St. James, Inc., currently uses traditional costing procedures, applying $866,80

Question

St. James, Inc., currently uses traditional costing procedures, applying $866,800 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

Product Pool No.1
(Driver: DLH) Pool No.2
(Driver: SU) Pool No.3
(Driver: PC) Beta 1,500        45       2,450      Zeta 2,900        55       830      Pool Cost $176,000        $330,000       $360,800

Explanation / Answer

Overhead cost allocated to Beta = 866800/(1500+2900)*1500= $295500 Overhead cost allocated to Zeta = 866800/(1500+2900)*2900= $571300

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