EcoFabrics has budgeted overhead costs of $1,077,300. It has allocated overhead

ID: 2718551 • Letter: E

Question

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 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 $410,400 and $666,900 is allocated to the design cost pool. Additional information related to these pools is as follows.

Wool Cotten Total

Machine hours 114,000 114,000 228,000

No of Setups 1,140 570 1710

Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.)

Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

Wool product line

Cotton product line

Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.)

What 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 rates for activity-based costing Cutting

per machine hour Design

per setup

Explanation / Answer

a. Overhead Rates for activity based costing:

Cutting = Cost / Machine Hours

Cutting = 410,400 / 228,000 = $1.8 Per Machine Hours

Design = Cost / No. of Setup

Design = 666,900 / 1,710 = $390 per set up

Amount of Overhead Allocated :

Wool:

114,000 x 1.8 = $205,200

1,140 x 390 = $444,600

Total = $649,800

Cotton:

114,000 x 1.8 = $205,200

570x 390 = $222,300

Total = $427,300

Overhead Rate using traditional approach: 1,077,300 / 513,000 = $2.10 Per Direct Labor Hour

Amount allocated using traditional approach = 1,077,300 / 2 = $538,650

Overhead Allocated to: Wool = 538,650

Cotton = 538,650

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EcoFabrics has budgeted overhead costs of $1,077,300. It has allocated overhead

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