Question

Comparing ABC and Plantwide Overhead Cost Assignments

Wellington Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs:

Setting up equipment	$870,000
Other overheard	$5,800,000

Setting up equipment is based on setup hours, and other overhead is based on oven hours.
Wellington produces two products, Fudge and Cookies. Information on each product is as follows:

	Fudge			Cookies
Units produced	8,000			445,000
Setup hours	12,000			3,000
Oven hours	5,000			35,000

Required:

Round your answers to the nearest whole dollar, unless otherwise directed.

1. Calculate the activity rate for (a) setting up equipment and (b) other overhead.

a. Setting up equipment	$ per setup hour
b. Other overhead	$ per oven hour

2. How much total overhead is assigned to Fudge using ABC?
$

3. What is the unit overhead assigned to Fudge using ABC? Round to the nearest cent.
$per unit

4. Now, ignoring the ABC results, calculate the plantwide overhead rate, based on oven hours.
$ per oven hour

5. How much total overhead is assigned to Fudge using the plantwide overhead rate?
$

6a. The difference in the total overhead assigned to Fudge is different under the ABC system and non–ABC system because .

6b. What is the difference in total overhead assigned to fudge under the two methods?

Answer 1

	1		A	Activity		B	A/B
		Activity Pool	Costs	Fudge	Cookies	Total Activity	Activity Rate
		Setting Up Equipment	870000	12000	3000	15000	58.00
		Other Overhead	5800000	5000	35000	40000	145.00
			6670000
		Activity Pool	Activity Rate
		Setting Up Equipment	58.00	Per Setup H
		Other Overhead	145.00	Per Oven H
	2&3	Assigned to Fudge:	A	B	A*B
		Activity Pool	Activity in Fudge	Activity Rate	Assignment
		Setting Up Equipment	12000	58	696000
		Other Overhead	5000	145	725000
					1421000
				Total	8000
				PU Cost	177.625
	4	Total Overhead	6670000
		Total Oven Hours	40000
		Overhead per Oven Hours	166.75
	5	Oven Hours in Fudge	5000
		Overhead per Oven Hours	166.75
		Assigned OH to Fudge	833750
	6A	The Difference is because of Assigned in ABC was more accurate and Less Accurate in Traditional Costing
	6B	ABC Method	1421000
		Traditional Costing	833750
		Difference	587250