Question

Rebecca's Pet Supply Corporation manufactures two models of crates, plastic and wire. The following activity and cost information has been compiled:

                               Number of             Number of                         Number of

Product                          Setups           Components             Direct Labor Hours

Plastic                                     4                           12                                     300

Wire                                       6                           18                                     200

Overhead costs               $50,000                   $75,000

Assume a traditional costing system applies the $125,000 of overhead costs based on direct labor hours.

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

b.   What is the total amount of overhead costs assigned to the wire crate?

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 plastic crate?

d.   What is the total amount of overhead costs assigned to the wire crate?

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

Answer 1

			Setups	Components	Total
		Total Overhead Costs	50,000.0	75,000.0	1,25,000.0
		Total DLHs			500.0	(300+200)
		Overhead Cost per DLH			250.0
	A&B		Plastic	Wire
		Direct Labor Hour	300.0	200.0
		Overhead Cost Allocated	75,000.0	50,000.0
	C&D		Setups	Components	Total				Plastic	Wire	Total
		Total Overhead Costs	50,000.0	75,000.0				Setups	4.00	6.00	10.00
		Total Activity Driver	10.0	30.0				Components	12.00	18.00	30.00
		Cost per Driver	5,000.0	2,500.0
		Allocation of Costs
			Setups	Components
		Plastic	20,000.0	30,000.0
		Wire	30,000.0	45,000.0
		Total Allcoation	50,000.0	75,000.0
	E	Both uses different base for Allocation. ABC method is better since it more precisely looks into the factor to be used for allocation and Allocate costs only for the activity used by product