Question

GOOSE Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, GOOSE uses a traditional costing system with direct labor hours as the allocation base. Actual hours for 20x3 were 20,000. In anticipation of developing an activity-based costing system, GOOSE has identified the following cost pools and activities associated with pillow production:

		Estimated Costs	Actual Costs
Activity	Driver	for 2017	for 2016
Material Cutting	Number of Cuts	$16,000	$13,665
Sewing machine setups	Number of setups	27,000	24,800
Factory maintenance	Number of direct labor hours	15,000	17,000
		$58,000	$55,465

Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labor (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 (30 minutes @ $8.00 per hour). In 20x4, GOOSE expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow

1) Calculate the cost per unit (dollar and cents) for each type of pillow under traditional costing: Total cost Plain ______; Total cost Fancy_______.

2) Calculate the cost per unit(dollar and cents) for each type of pillow under ABC: total cost Plain______; Total cost Fancy _____.

3) Under traditional costing, which type of pillow cross-subsidizes the other pillow? ___________________________________.

Answer 1

1) Overhead allocation rate under traditional costing = total overhead cost / total direct labour hours

= 58000 / 20000

= $2.9

	Plain sofa	Fancy sofa
Units	8000	10000
Direct material	$10,000	$15,000
Direct labour	$16,000	$40,000
Overhead cost	$5,800	$7,250
Total cost	$31,800	$62,250
Per unit cost	$3.98	$6.23

The overhead cost has been calculated as follows:

	Plain sofa	Fancy sofa
Direct labour hours	2000	2500
Overhead rate	$2.90	$2.90
Overhead cost	$5,800.0	$7,250.0

2)

Activity	Drivers	Activity cost	Overhead rate
Material cutting	20000	16000	0.8
Sewing machine setps	15	27000	1800.0
Factory maintenance	4500	15000	3.3

Overhead allocation :

Plain Sofa	Material cutting	Sewing machine setps	Factory maintenance	Total
Drivers	10000	5	2000
Rate	0.8	1800.0	3.3
Overhead cost	$8,000.0	$9,000.0	$6,666.7	$23,666.7
Fancy sofa	Material cutting	Sewing machine setps	Factory maintenance	Total
Drivers	10000	10	2500
Rate	0.8	1800.0	3.3
Overhead cost	$8,000.0	$18,000.0	$8,333.3	$34,333.3

Cost per unit under ABC:

	Plain sofa	Fancy sofa
Units	8000	10000
Direct material	$10,000	$15,000
Direct labour	$16,000	$40,000
Overhead cost	$23,667	$34,333
Total cost	$49,667	$89,333
Per unit cost	$6.21	$8.93

3) Under traditional costing plain sofa pillow cross subsidizes the fancy sofa pillow.