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	$230,000
Other overheard	$1,160,000

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	4,000			1,000
Oven hours	1,000			7,000

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. Round to the nearest cent.
$ 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  .

( different treatment of set up costs, different in the units producted, difference in sale prices of the products, OR different oven temperatures required for baking fudge and cookies)

6b. What is the difference in total overhead assigned to fudge under the two methods?

$

Answer 1

1.) a) Setting up equipment = Total  Setting up equipment Costs / Setup hours = $230,000 / (4,000 + 1,000) = $46

b) Other overhead = Total Other overhead Costs / Oven hours = $1,160,000 / (1,000 + 7,000) = $145

2.) Total Overhead assigned to Fudge = Setting up equipment O/H + Other overhead

= 4000 * $46 + 1000 * $145 = $329,000

3.) Unit overhead assigned to Fudge using ABC = Total Overheads assigned / Total units = $329,000 / 8000 = $41.125

4.) Plantwide rate = Total Overheads / Oven hours = ($230,000 + $1,160,000) / (1,000 + 7,000) = $173.75

5.) Total overhead assigned to Fudge using plantwide rate = $173.75 * 1000 = $173,750

6.) a.) The difference in ABC and Non-ABC is due to different treatment of set up costs

b.) Difference in total overhead assigned to fudge under the two methods = $329,000 - $173,750 = $155,250

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