Question

Required information E4-12 and E4-13 Skip to question Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow: Fabric Case Leather Case Number of labor hours 15,000 8,000 Number of material moves 672 1,428 Number of setups 108 162 Total estimated overhead costs are $393,300, of which $315,000 is assigned to the materials handling cost pool and $78,300 is assigned to the setup cost pool. E4-12 (Algo) Assigning Costs Using Traditional System, ABC System [LO 4-1, 4-3, 4-4, 4-5, 4-6] Required: 1. Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours. 2. Calculate the overhead assigned to the fabric case using ABC. 3. Was the fabric case over- or undercosted by the traditional cost system compared to ABC

Answer 1

1. $256,500

2. $132,120

3. The fabric case is over costed by the traditional cost system compared to ABC

Step-by-step explanation:

1. Calculation for the overhead assigned to the fabric case using the traditional costing system based on direct labor hours.

Traditional costing

Overhead Assigned under traditional costing = 393,300/(15,000+8,000)*15,000

Overhead Assigned under traditional costing = 393,300/23,000*15,000

Overhead Assigned under traditional costing = $256,500

Therefore the overhead assigned to the fabric case using the traditional costing system based on direct labor hours will be $256,500

2. Calculation for the overhead assigned to the fabric case using ABC.

ABC Costing

First step is to calculate the Material handling rate

Material handling rate = 315,000/(672 +1,428)

Material handling rate = 315,000/2,100

Material handling rate = 150 per move

Second step is to calculate the Setup cost

Setup cost=78,300/(108+ 162)

Setup cost = 78,300/270

Setup cost= 290 per setup

Now let calculate the Overhead assigned to ABC

Overhead assigned to ABC = (672*150)+(108*290)

Overhead assigned to ABC=100,800+31,320

Overhead assigned to ABC=$132,120

Therefore the overhead assigned to the fabric case using ABC will be $132,120

3. Based on the above calculation Fabric case is OVER costed with the amount of $256,500 Under traditional costing system compared to ABC.