Billy Bob manufactures two models of grooming stations, a standard and a deluxe
ID: 2460475 • Letter: B
Question
Billy Bob manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead costs $40,000 $120,000
Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?
Explanation / Answer
Predetermined overhead application rate
= Budgeted overhead costs / budgeted direct labour hours
= $160000 / (650 + 150) hours = $200 / hour
a) overhead costs assigned to standard model = $200 / hour x 650 hours = $130000
b) Overhead costs assigned to deluxe model = $200/hour x 150 hours = $30000
c)
d)
e)
Under traditional system a plant wide predetermined overhead rate is used to allocate the overhead costs to the products based on either direct labour hour or direct machine hours usually. Whereas under ABC,, the overhead is allocated to the products based on the activities used in producing different products or the resources consumed by different products. The entire overhead costs is tracked down to various activities which caused the overhead costs and thereafter the activities that are used by each product is identified. the overhead is allocated on the basis of the resources consumed by each product depending on the different activities used in producing the products.
Obviously, ABC method is more accurate to determine the allocated overhead to each product as it allocated overhead to the products based on the resources consumed by them.
Activity drivers Standard Deluxe Total quantity of activity drivers Overhead costs Overhead cost per activity set up 3 7 10 $40000 $4000 per set up components 30 50 80 $120000 $1500 per componentRelated Questions
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