In: Accounting
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?
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.