Exercise 17-3 EcoFabrics has budgeted overhead costs of $1,077,300. It has alloc
ID: 2569704 • Letter: E
Question
Exercise 17-3 EcoFabrics has budgeted overhead costs of $1,077,300. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 513,000 for the current year, The company has deoded 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 ot setups). Overhead allocated to the cutting cost pool is $410,400 and $666,900 is allocated to the design cost pool. Additional information related to these pools is as follows. Wool Cotn otal 14,000 114,000 228,000 Machine hours Number of sctups 1,140 570 1,710 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 ootton product line using activity-based costing. Wool product lineCotton duct line Overhead AllocatedExplanation / Answer
Answer:
1
The overhead rate using activity based costing
Cutting
1.80
Per Machine Hour
Design
390
Per set up
Working notes for the above answer
rate as per activity based costing
Overhead allocated cutting cost pool/total machine hours
Cutting
Overhead allocated cutting cost pool/total machine hours
=410 400/228000
=$1.8
Design
=666,900 /1710 set up
=$390 per set up
_____________________________________________
2
amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.
Wool
product line
Cotton product line
Overhead Allocated
649800
427500
Working notes for the above answer
Cutting rate*machine hours + design rate*# of setups
For wool
=(114000*1.8)+(1140*390)
=205200+444600
=649800
For Cotton
==(114000*1.8)+(570*390)
=205200+222300
=427500
__________________________________________________
3
The overhead rate using traditional approach
Overhead rates using the
traditional approach
$2.10
per direct
labor hour
working notes for the answer
rate using traditional approach
=Estimated overhead costs/direct labor hours
=1,077,300 /513,00
=$2.1
_____________________________________________________
4
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
Wool
product line
Cotton product line
Overhead Allocated
538650
538650
(1077300/2)
(1077300/2)
Cutting
1.80
Per Machine Hour
Design
390
Per set up
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