Question

Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:

product	number of setups	number of components	Direct Labor Hours
Standard	3	30	650
Deluxe	7	50	150
Overhead Costs	$40,000	$120,000
Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours.

a.   What is the total amount of overhead costs assigned to the standard model?
b.   What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c.   What is the total amount of overhead costs assigned to the standard model?
d.   What is the total amount of overhead costs assigned to the deluxe model?
e.   Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

Answer 1

As Per Traditional Costing System:-

a) amount of Overhead Cost assigned to the standard model :-

= ($160000/(650+150))*650

= ($160000/800)*650

= $130000

b) Amount of Overhead Cost assigned to the Deluxe Model :-

= (($160000/(650+150))*150

= ($160000/800)*150

= $30000

As Per Activity Based Costing System:-

c) Amount of Overhead assigned to the Standard Model :-

= ($4000*3) + ($1500*30)

= $12000 + $45000

= $57000

d) Amount of Overhead Cost assigned to the Deluxe Model:-

= ($4000*7) + ($1500*50)

= $28000 + $75000

= $103000

Overhead Cost per Setup = $40000/(3+7) = $40000/10 = $4000

Overhead Cost per Component = $120000/(30+50) = $120000/80 = $$1500

e) The ABC system provides different results than the traditional system which allocates

overhead costs on the basis of direct labor hours.

ABC system provides a best estimate of costs.