EcoFabrics has budgeted overhead costs of $945,000. It has allocated overhead on a plantwide basis to its two products (wool and

Question

2 years ago

14

EcoFabrics has budgeted overhead costs of $945,000. It has allocated overhead on a plantwide basis to its two products (wool and

cotton) using direct labor hours which are estimated to be 450,000 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 $360,000 and $585,000 is allocated to the design cost pool. Additional information related to these pools is as follows.
Wool Cotton Total
Machine hours 100,000 100,000 200,000
Number of setups 1,000 500 1,500
1) Calculate the overhead rate using activity based costing.
2) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.
3) Calculate the overhead rate using traditional approach.
4) 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?

Business

1 answer:

umka21 [38] · Answer 1 · 2023-04-21T13:55:40+03:00

Answer:

Eco Fabrics

Wool Cotton Total

Cutting 180,000 180,000 360,000

Design (585,000/1500)*1000

390,000 195,000 585,000

Total 570,000 375,000 945,000

Overhead Rate = Total Overhead Costs/ Direct Labor Hours= 945,000/ 450,000= 2.1

Overhead Rate for Wool = 570,000/225,000= 2.533

Overhead Rate for Cotton = 375,000/225,000= 1.667

Working:

Cutting Design

(cost driver is machine hours) (cost driver is number of setups)

Overhead $360,000 $585,000

Wool Cotton Total

Machine hours 100,000 100,000 200,000

Number of setups 1,000 500 1,500