Question

EcoFabrics has budgeted overhead costs of $1,001,700. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 477,000 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 $381,600 and $620,100 is allocated to the design cost pool. Additional information related to these pools is as follows.

Wool Cotten Total

Machine hours 114,000 114,000 228,000
No of Setups 1,140 570 1710

Required:
a. Calculate the overhead rate using activity based costing.
b. Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.
c. What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

Answer 1

Answer and Explanation:

a. The computation of overhead rate using activity-based costing is shown below:-

Cutting = Cost ÷ Machine Hours

Cutting = $381,600 ÷ 228,000

= $1.67 Per Machine Hours

Design = Cost ÷ No. of Setup

Design = $620,100 ÷ 1,710

= $362.63 per set up

The computation of the amount of Overhead Allocated is shown below:-

Wool:

114,000 × $1.67

= $190,380

= 1,140 × $362.63

= $413,398

Total = $603,778

Cotton:

114,000 × $1.67

= $190,380

= 570 × $362.63

= $206,669

Total = $397,049

The computation of amount allocated using traditional approach is shown below:- = $1,001,700 ÷ 2

= $500,850

Overhead Allocated to Wool = $500,850

Cotton = $500,850