Bunker makes two types of briefcase, fabric and leather. The company is currentl

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:

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?

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:

Explanation / Answer

1) overhead rate as per traditional costing system:

Overhead rate base on the "Direct labour hours" = total estimated overhead cost / estimated labour hour

Fabric leather

   overhead rate overhead cost / 18000hour overhead cost / 13000 hour   

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