Lee’s Furniture manufactures two types of chairs---recliner and office chair. The following activity and cost information...

Lee’s Furniture manufactures two types of chairs---recliner and office chair. The following activity and cost information has been compiled:

Number of Number of Number of

Product Setups Components Direct Labor Hours

Recliner 5 40 300

Office chair 8 45 175

Overhead costs $80,000 $180,000

Assume a traditional costing system applies the $260,000 of overhead costs based on direct labor hours.

a. What is the total amount of overhead costs assigned to the recliner?

b. What is the total amount of overhead costs assigned to the office chair?

Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.

c. What is the total amount of overhead costs assigned to the recliner?

d. What is the total amount of overhead costs assigned to the office chair?

e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

Expert Solution



OH rate per DLH:
Total overheads (80,000+180,000)	2,60,000
Divide: Total DLH (300+175)		475
OH rate per DLH:			547.37

OH allocated as per Tradition:
			Recliner	office chair
DLH used			300	175
Multiply: OH rate per DLH	547.37	547.37
OH allocated		1,64,211	95,790

OH allocated to recliner: $164,211
OH allocated to Office chair: $95790

ABC:
Activity rateL
Activity		Total OH	Drivers	Activity rate
Setup cost	80,000	13	6153.85	per setup
Component cost	1,80,000	85	2117.65	per component

Oh allocated:
Activity		Rate	Recliner	Office Chair
			Driver	OH	Driver	OH
Setup cost	6153.85	5	30769.25	8	49230.8
Component cost	2117.65	40	84706	45	95294.25
		Total overheads	1,15,475		1,44,525

OH allocated to Recliner: $115,475
Oh allocated to Office chair: $ 144,525

Req c.
Comparison:
			Recliner	Office chair
OH as per Traditional	164211	95790
OH as per ABC		115475	1,44,525
Difference in cost		48736	-48,735

ekkarill92 answered 1 year ago

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