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	$720,000
Other overheard	$2,160,000

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	1,800			12,600

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) Calculation of Activity Rate (Amounts in $)

	Setting up equipment	Other overhead
Total Estimated overheads (A)	720,000	2,160,000
Activity Base	Setup hours	Oven hours
Total Activity base hours (B)	15,000 (12,000+3,000)	14,400 (1,800+12,600)
Activity Rate (A/B)	$48 per setup hour	$150 per oven hour

Therefore the activity rate is:-

a. Setting up equipment	$48 per setup hour
b. Other overhead	$150 per oven hour

2) Calculation of total overhead assigned to Fudge using ABC (Amounts in $)

Allocated setting up equipment ($48*12,000 setup hours) (a)	576,000
Allocated other overhead ($150*$1,800 oven hours) (b)	270,000
Total Allocated Overhead to Fudge (a+b)	846,000

3) Unit Overhead assigned to Fudge = Total Assigned Overhead/Units produced

= $846,000/8,000 = $105.75 per unit

Therefore unit overhead assigned to Fudge using ABC is $105.75 per unit.

4) Plantwide Overhead rate = Total Budgeted Overhead/Total Oven hours

Total Budgeted Overheads = Setting up Equipment+Other Overheads

= $720,000+$2,160,000 = $2,880,000

Total Oven hours = 1,800+12,600 = 14,400 hours

Plantwide Overhead rate = = $2,880,000/14,400 hrs = $200 per oven hour

Therefore the plantwide overhead rate, based on oven hours is $200 per oven hour.

5) Total overhead assigned to Fudge using plantwide rate = Plantwide OH rate*Oven hours

= $200 per oven hour*1,800 hrs = $360,000

6a) The difference in the total overhead assigned to Fudge is different under the ABC system and non–ABC system because plantwide overhead rate is used for allocating overhead which is based only on Oven hours whereas under ABC system, different activity rates based on setup hours and oven hours are used to allocate setting up and other overhead cost separately.

6b) Diff in Overhead assigned under two methods = $846,000 - $360,000 = $486,000