Exercise 4-3 EcoFabrics has budgeted overhead costs of $1,152,900. It has alloca
ID: 2408159 • Letter: E
Question
Exercise 4-3 EcoFabrics has budgeted overhead costs of $1,152,900. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 549,000 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 $439,200 and $713,700 is allocated to the design cost pool. Additional information related to these pools is as follows. Wool Cotton Total Machine hours 122,000 122,000 244,000 Number of setups 1,220 610 1,830 Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.) Overhead rates for activity-based costing Cutting Design per machine hour per setup Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing Wool product lineCotton product line Overhead AllocatedExplanation / Answer
Answer
1 , overhead rate activity costing activity rate
cutting = 439200 / 244000
= 1.80 per machine hour
design = 713700 / 1830
= 390 per setup hour
2 , activity based costing
wool product line = 122000 * 1.80 + 1220 * 390
= 695400
cotton product line = 122000 * 1..80 + 610 * 390
= 457500
3 , traditional approach ; pre determined overhead rate = 1152900 / 549000
= 2.1 per hour
4 . traditional costing
wool production line = 549000 * 05 * 2.1
= 576450
cotton product line = 549000 * 0.5 * 2.1
= 576450
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