Question

In: Accounting

Style Co. incurs $540,000 of overhead costs each year in its three main departments, setup ($40,000),...

Style Co. incurs $540,000 of overhead costs each year in its three main departments, setup ($40,000), machining ($400,000), and packing ($100,000). The setup department performs 50 setups per year, the machining department works 8,000 hours per year, and the packing department packs 200 orders per year. Information about Style Co.'s 2 products is as follows:

                                                             Jackets          Cardigans

         Number of setups                        10                        40

         Machining hours                     3,000                   5,000

         Orders packed                           110                        90

Using Activity Based Costing, how much overhead is assigned to Jackets each year?

Solutions

Expert Solution

In absorption costing, overheads are allocated in proportion to production volumes.

On th contrary, Activity Based Costing allocates overheads on the basis of the factors driving the overheads (cost drivers).

Given in question
Cost pool Amount $ Cost driver Jackets Cardigans Total
Setup 40,000 Number of setups            10            40            50
Machining 400,000 Machining hours       3,000       5,000       8,000
Packing 100,000 Orders packed          110            90          200
Total 540,000 3,120 5,130 8,250

Assignment of overheads based on Activity Based Costing i.e. using cost drivers:

Cost pool Jackets Cardigans Total $
Setup

$    8,000

[10/50 X 40,000]

$ 32,000

[40/50 X 40,000]

$ 40,000

Machining

$150,000

[3,000/8,000 X 400,000]

$250,000

[5,000/8,000 X 400,000]

$400,000

Packing

$ 55,000

[110/200 X 100,000]

$ 45,000

[90/200 X 100,000]

$100,000

Total $213,000 $327,000 $540,000

Using ABC, overheads assigned to Jackets in $213,000.


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