Question

unker 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	20,000		10,000
Number of material moves	819		1,131
Number of setups	84		156

Total estimated overhead costs are $315,900, of which $253,500 is assigned to the materials handling cost pool and $62,400 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

Solution 1:

Estimated overhead cost = $315,900

Estimated direct labor hours = 20000+10000 = 30000

Overhead recovery rate (Traditional costing system) = Esitmated overhead cost / Direct labor hours

= $315,900 / 30000 = $10.53 per hour

Computation of Overhead Assigned to Product (Traditional Costing)
Particulars	Feabric Case	Leather Case
Number of labor hours	20000	10000
Overhead recovery rate	$10.53	$10.53
Overhead Assigned	$210,600.00	$105,300.00

Hence overhead to be assigned to Leather case using traditional costing system is $105,300.

Solution 2:

Computation of Acitivity Rate and Overhead Assigned to Product (ABC Costing)
Cost component	Overhead Amount	Activity Base	Qty of activity base	Overhead recovery rate	Overhead Assigned to Fabric case		Overhead Assigned to Leather case
					Qty of Activity Base	Assigned Overhead	Qty of Activity Base	Assigned Overhead
Material Handling Cost	$253,500.00	Number of material moves	1950	$130.00	819	$106,470.00	1131	$147,030.00
Setup cost	$62,400.00	Number of setups	240	$260.00	84	$21,840.00	156	$40,560.00
Total	$315,900.00					$128,310.00		$187,590.00

Hence overhead cost assigned to leather case under ABC is $187,590.

Solution 3:

As cost assingend under traditional costing is lower than cost assigned under ABC costing for leather case, hence leather case was undercosted by the traditional cost system as compared to ABC.