Question

Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow: Fabric Case Leather Case Number of labor hours 21,000 9,000 Number of material moves 630 1,170 Number of setups 63 147 Total estimated overhead costs are $282,300, of which $234,000 is assigned to the materials handling cost pool and $48,300 is assigned to the setup cost pool. Required: 1. Calculate the overhead assigned to the leather case line using the traditional costing system based on direct labor hours. (Do not round intermediate calculations.) 2. Calculate the overhead assigned to the leather case line using ABC. 3. Was the leather case over- or undercosted by the traditional cost system compared to ABC?

Answer 1

Answer:

1)

Overhead assigned under traditional costing        = Estimated overhead Costs / Total Direct Labor Hours x Leather Case DLH        =   [$ 282,300 / (21,000 + 9,000 )] x 9,000        =     $ 9.41 x 9,000        =     $ 84,690

Overhead assigned   =     $ 84,690

2)

Overhead assigned Under ABC Costing              = [$ 234,000 / ( 630 + 1,170) x 1,170 ] + [ $ 48,300 / (63 + 147 ) x 147 ]              =   ( $ 130 x 1,170 ) + ( $ 230 x 147 )              =      $ 152,100 + $ 33,810              =       $ 185,910

Overhead assigned   =    $ 185,910

3)

Difference =   $ 84,690 (-) $ 185,910   = $ 101,220

Leather Case Under costed by $ 101,220