Question

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?

Answer 1

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.