Question

Comparing ABC and Plantwide Overhead Cost Assignments

Wellington Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs:

Setting up equipment	$322,000
Other overheard	$5,800,000

Setting up equipment is based on setup hours, and other overhead is based on oven hours.
Wellington produces two products, Fudge and Cookies. Information on each product is as follows:

	Fudge			Cookies
Units produced	8,000			445,000
Setup hours	5,600			1,400
Oven hours	5,000			35,000

Required:

Round your answers to the nearest whole dollar, unless otherwise directed.

1. Calculate the activity rate for (a) setting up equipment and (b) other overhead.

a. Setting up equipment	$ per setup hour
b. Other overhead	$ per oven hour

2. How much total overhead is assigned to Fudge using ABC?
$

3. What is the unit overhead assigned to Fudge using ABC? Round to the nearest cent.
$per unit

4. Now, ignoring the ABC results, calculate the plantwide overhead rate, based on oven hours. Round to the nearest cent.
$ per oven hour

5. How much total overhead is assigned to Fudge using the plantwide overhead rate?
$

6a. The difference in the total overhead assigned to Fudge is different under the ABC system and non–ABC system because different treatment of setup costs. .

6b. What is the difference in total overhead assigned to fudge under the two methods?

$

Answer 1

Req 1.
Activity rate:
Activity		OH cost	Drivers	Activity rate
Setting up		322000	7000	46	per setup hour
Other overheads	5800000	40000	145	per oven hours
Req 2.
Overheads allocated to Fudge:
Activity		Rate	Driver used	Oh cost allocated
Setting up		46	5600	257600
Other overheads	145	5000	725000
		Total Overheads	982600
Req 3.
Overheads allocated under ABC		982600
Divide: Total units produced		8000
Oh cost per unit			122.83
Req 4.
Plantwide Oh rate per Oven hour
Total Overheads (322000+5800000)	6122000
Divide: Total Oven hours		40000
Oh rate per oven hours		153.05
Req 5.
Oh allocated to Fudge
Oven hours used			5000
Multiply: Oh rate per oven hour		153.05
Oh allocated to Fudge		765250
Req 6-a
Yes, there is a difference
Req 6-b
Overheads of Fudge as per ABC		982600
Overheads of Fudge as per plantwide rate	765250
Difference in oh cost			217350