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	$420,000
Other overheard	$5,208,000

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	4,200			29,400

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

Ans:

1.

Calculation of activity rate per hour:

Setting up equipment costs: $420,000

Total setup hours: 5,600+1,400 = 7,000

Setting up equipment Cost per hour = $420,000/7,000 = $60 per hour

Other Overhead costs: $5,208,000

Total oven hours: 4,200+29,400 = 33,600

Other overhead Cost per hour = $5,208,000/33,600 = $155 per hour

2.

Cost assigned to Fudge:

setup cost:

Setup hours for fudge*cost per hour= 5,600*$60 = $336,000

Other overhead Cost:

Oven hours for fudge* cost per hour = 4,200*$155 = $651,000

Total = $987,000

3.

Unit overhead cost for Fudge:

Total overhead cost of fudge/total units produced for fudge

=($336,000+$651,000)/8,000 = $123.38 per unit

4.

Plant wise overhead rate based on oven hours:

Total over head cost of plant/total oven hours

= ($420,000+$5,208,000)/33,600 = $162.14 per hour.

5.

Cost assigned to fudge using Plantwise overhead rate:

Fudge oven hours*cost per hour

=4,200*162.14 = $680,988

6.

Difference between ABC method and plantwise allocation method for cost assigned to fudge:

=$987,000-$680,988

=$306,012