Question

Julio produces two types of calculator, standard and deluxe. The company is currently using a traditional costing system with machine hours as the cost driver but is considering a move to activity-based costing. In preparing for the possible switch, Julio has identified two cost pools: materials handling and setup. The collected data follow:

	Standard Model		Deluxe Model
Number of machine hours	26,000		31,000
Number of material moves	600		900
Number of setups	90		550

Total estimated overhead costs are $344,380, of which $157,500 is assigned to the material handling cost pool and $186,880 is assigned to the setup cost pool.

Required:
1. Calculate the overhead assigned to each product using the traditional cost system. (Round the overhead rate to four decimal places.)

	Overhead assigned Standard Model Deluxe Model

2. Calculate the overhead assigned to each product using ABC.

	Overhead Assigned Standard Model Deluxe Model

Answer 1

The following table shows you the cost driver quantity of various activities including the machine hours:

In traditional system, overhead is allocated based on machine hours. For that, overhead rate is calculated by dividing the overhead amount by the total no. of machine hours.

1. Overhead assignment rate in traditional system = ($344,380) / 57,000 hours = $6.0417 per machine hour.

Overhead assignment among the Standard and deluxe are as follows:

Standard Model Overhead = $344,380 x (26,000/57,000) = $157,085.61 (or) 26,000 hours x $6.0417 = $157,084.2

Deluxe Model Overhead = $344,380 x (31,000/57,000) = $187,294.39 (or) 31,000 x $6.0417 = $187,292.7

2. Activity Based Costing:

the following table shows the costs apportionment in ABC:

this can be simplified as,

Hope this is helpful!!