Question

Problem 2. 

Fulcrum Industries manufactures dining chairs and tables. The following information is available:

	Dining Chairs		Tables		Total Cost
Machine setups	200		600		$48,000
Inspections	250		470		$72,000
Labor hours	2,600		2,400

Fulcrum is considering switching from one overhead rate based on labor hours to activity-based costing. 

Instructions 

Perform the following analyses for these two components of overhead: 

a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate. 

b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing. 

c. Comment on your findings.

Answer 1

a.

Overhead cost using single OH rate
particulars	amount(in $)	working
total cost (A)	120000	(48000+72000)
total labour hours(B)	5000	(2600+2400)
overhead rate per labour hour(A/B)	24
machine set up cost	62400	(2600*24)
Inspection cost	57600	(2400*24)
total	120000

b.

Overhead costing using Activity based costing
particulars	Dining chairs(in $)	tables(in $)	working	total(in $)
machine set up cost	12000	36000	(48000/(200+600))	48000
	(60*200)	(60*600)
Inspection cost	25000	47000	(72000/(250+470))	72000
	(100*250)	(100*470)
total	37000	83000		120000

c.

As per costing method of single OH rate , cost allocated to machine set up cost is $ 62400 & for inspection $ 57600/-.

however as per ABC , cost allocated to machine set up is $48000/- & for inspection $72000/-

Therefore from the above analysis, we conculde that as per ABC analysis cost is accurately allocated to each head , however while using single OH rate cost is not allocated appropriately.