Question

Fabrics has budgeted overhead costs of $1,039,500. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 495,000 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 $396,000 and $643,500 is allocated to the design cost pool. Additional information related to these pools is as follows:

Wool Cotton Total
Machine hours 110,000 110,000 220,000
Number of setups 1,100 550 1,650

Required:
Calculate the overhead rate using activity based costing.

Answer 1

Answer:

Fabrics

Overhead Rates based on activity-based costing

Cutting = $1.80

Design = $390

Explanation:

a) Data and Calculations:

Budgeted overhead costs = $1,039,500

Estimated direct labor hours for the current year = 495,000 hours

Predetermined overhead rate based on traditional method = $2.1 ($1,039,500/495,000)

Activity Cost    Activity Cost Drivers  Overhead    Wool   Cotton    Total

Pools

Cutting            Machine hours           $396,000  110,000 110,000  220,000

Design             Number of setups     $643,500       1,100      550        1,650

Overhead Rates based on activity-based costing

Cutting = $1.80 ($396,000/220,000)

Design = $390 ($643,500/1,650)