Question

American Fabrics has budgeted overhead costs of $990,000. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 450,000 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are: cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $360,000 and $630,000 is allocated to the design cost pool. Additional information related to these pools is as follows.

Wool Cotton Total
Machine hours 100,000 100,000 200,000
Number of setups 1,000 500 1,500
Calculate the overhead rates for activity-based costing using the traditional approach. (Round answers to 2 decimal places, e.g. $12.25.)
Overhead rates for activity-based costing
Cutting $... per machine hour
Design $... per setup
Overhead rates using the traditional approach ... per direct labor hour

Answer 1

Results are below.

Step-by-step explanation:

To calculate the activities rates, we need to use the following formula:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Cutting= 360,000 / 200,000= $1.8 per machine hour

Design= 630,000 / 1,500= $420 per setup

Now, we need to determine the predetermined overhead rate for the whole company based on direct labor hours:

Predetermined manufacturing overhead rate= 990,000 / 450,000

Predetermined manufacturing overhead rate= $2.2 per direct labor hour