Assign overhead using traditional costing and ABC. E5.19 (LO 1, 2) International Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on a plant-wide basis to its two products (wool and cotton) using direct labour hours, which are estimated to be 477,500 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 (the cost driver is machine hours) and design (the cost driver is the number of set- ups). Total estimated machine hours is 200,000, and total estimated number of set- ups is 1,500. Overhead allocated to the cutting cost pool is $400,000 and $555,000 is allocated to the design cost pool. Additional information related to product usage by these pools is as follows: Wool Cotton Machine hours 100,000 100,000 Number of set-ups 1,000 500 Instructions a. Determine the amount of overhead assigned to the wool product line and the cotton product line using activity-based costing. b. What is the difference between the allocation of overhead to the wool and cotton product lines using activity-based costing versus the traditional approach, assuming direct labour hours were incurred evenly between wool and cotton?
Assign overhead using traditional costing and ABC. E5.19 (LO 1, 2) International Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on a plant-wide basis to its two products (wool and cotton) using direct labour hours, which are estimated to be 477,500 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 (the cost driver is machine hours) and design (the cost driver is the number of set- ups). Total estimated machine hours is 200,000, and total estimated number of set- ups is 1,500. Overhead allocated to the cutting cost pool is $400,000 and $555,000 is allocated to the design cost pool. Additional information related to product usage by these pools is as follows: Wool Cotton Machine hours 100,000 100,000 Number of set-ups 1,000 500 Instructions a. Determine the amount of overhead assigned to the wool product line and the cotton product line using activity-based costing. b. What is the difference between the allocation of overhead to the wool and cotton product lines using activity-based costing versus the traditional approach, assuming direct labour hours were incurred evenly between wool and cotton?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Assign overhead using traditional costing and ABC.
E5.19 (LO 1, 2) International Fabrics has budgeted overhead costs of $955,000. It
has allocated overhead on a plant-wide basis to its two products (wool and cotton)
using direct labour hours, which are estimated to be 477,500 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
(the cost driver is machine hours) and design (the cost driver is the number of set-
ups). Total estimated machine hours is 200,000, and total estimated number of set-
ups is 1,500. Overhead allocated to the cutting cost pool is $400,000 and $555,000 is
allocated to the design cost pool. Additional information related to product usage by
these pools is as follows:
Wool
Cotton
Machine hours
100,000
100,000
Number of set-ups
1,000
500
Instructions
a. Determine the amount of overhead assigned to the wool product line and the
cotton product line using activity-based costing.
b. What is the difference between the allocation of overhead to the wool and cotton
product lines using activity-based costing versus the traditional approach,
assuming direct labour hours were incurred evenly between wool and cotton?
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