In: Accounting
6. Julio produces two
types of calculator, standard and deluxe. The company is currently
using a traditional costing system with machine hours as the cost
driver but is considering a move to activity-based costing. In
preparing for the possible switch, Julio has identified two cost
pools: materials handling and setup. The collected data
follow:
Standard Model | Deluxe Model | |||
Number of machine hours | 25,800 | 30,800 | ||
Number of material moves | 590 | 890 | ||
Number of setups | 70 | 540 | ||
Total estimated overhead costs are $347,100, of which $170,200 is
assigned to the material handling cost pool and $176,900 is
assigned to the setup cost pool.
Required:
1. Calculate the overhead assigned to each product using
the traditional cost system.
2. Calculate the overhead assigned to each product
using ABC.
Answer:
1.Overhead assigned to each product using the Traditional cost system
Pre-determined overhead rate = Total estimated overhead costs / Total no. of Machine hours
Total estimated overhead costs = $347,100
Total no. of Machine hours = 25,800 hours + 30,800 hours = 56,600 hours
Pre-determined overhead rate = $347,100 / 56,600 hours
= $6.13 per machine hour
Overheads assigned to Standard Model = Pre-determined overhead rate * No. of Machine hours used
= $6.13 per machine hour * 25,800 machine hours
= $158,219
Overheads assigned to Deluxe Model = Pre-determined overhead rate * No. of Machine hours used
= $6.13 per machine hour * 30,800 machine hours
= $188,881
2.Overhead assigned to each product using ABC
From the above data it is evident that
Overheads assigned to Standard Model under ABC = $88,150
Overheads assigned to Deluxe Model under ABC = $258,950