Question

Please do it by type not pics.

Smithson, Inc. produces two types of gas grills: a family model and a deluxe model. Smithson’s controller has decided to use a plant-wide overhead rate based on direct labor costs. The president of the company recently heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations:

                                                                        Family Model      Deluxe Model

                        Direct labor costs                        $75,000                $150,000

                        Machine hours                                2,000                    2,000

                        Setup hours                                        200                         800

Total estimated overhead costs are $450,000. Overhead cost allocated to the machining activity cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool.

Instructions

(a)       Compute the overhead rate using the traditional (plantwide) approach. (10 points)

(b)       Compute the overhead rates using the activity-based costing approach. (15 points)

(c)       Determine the difference in allocation between the two approaches. (25 points)

FOR 10 BONUS POINTS COMPLETE PART D

(d)       Smithson, Inc. decided to implement the activity-based costing approach and was quite successful in its use.   However, the controller is wondering if instead of only two activity cost pools, they should expand to three activity cost pools based on the following:

                                                                        Family Model      Deluxe Model

                        Direct labor costs                        $75,000                $150,000

                        Machine hours                                 2,000                    2,000

                        Setup hours                                        200                         800

                        Packaging hours                                  50                           75

The estimated overhead of $450,000 is allocated as follows: machining activity cost pool $240,000, machine set up $170,000 and packaging $40,000.

(1)       Determine the overhead rates using the activity-based costing approach with three cost pools.

(2)       Determine the overhead allocation for the family model and the deluxe model using three activity cost pools. What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool?

Answer 1

(a)       Compute the overhead rate using the traditional (plantwide) approach. (10 points)

=( Estimated overhead costs $450,000)/(Direct labor costs ($75,000 + $150,000)

=$ 2 Per Direct Labor or 200% of Direct Labor cost

(b)       Compute the overhead rates using the activity-based costing approach. (15 points)

		Total Activities	Activity Rate
machining activity	270000	4000	67.50	Per MH
machine setup activity	180000	1000	180.00	Per Setup
Total	450000

(c)       Determine the difference in allocation between the two approaches. (25 points)

	Standared	custome	Total
Overhead Allocation(traditional (plantwide) approach)
75000*200%	150000
150000*200%		300000
overhead Allocated	150000	300000	450000
Activity-based costing approach
machining activity
2000*67.50	135000
2000*67.50		135000
machine setup activity
200*180	36000
800*180		144000
overhead Allocated	171000	279000	450000
Difference	-21000	21000	0