Question

Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow: Fabric Case Leather Case Number of labor hours 15,000 9,000 Number of material moves 820 1,230 Number of setups 40 220 Total estimated overhead costs are $380,300, of which $307,500 is assigned to the materials handling cost pool and $72,800 is assigned to the setup cost pool. Calculate the overhead assigned to the fabric case using ABC. (Round activity rates or activity proportions, and intermediate calculations to four decimal places.) Was the fabric case over- or undercosted by the traditional cost system compared to ABC?

Answer 1

Cost item	Cost	Activity	Cost per activity
materials handling cost pool	307,500	2,050 material moves	$150 per material move
setup cost pool	72,800	260 setups	$280 per setup

Calculation of the overhead assigned to the fabric case using ABC.

Cost item	Activity	Cost per activity	Total cost
materials handling cost pool	820 material moves	$150 per material move	820 x 150 = $123,000
setup cost pool	40 setups	$280 per setup	40 x 280 = $11,200
			$134,200

Hence, overhead assigned to the fabric case using ABC = $134,200

Total estimated overhead costs = $380,300

Total estimated direct labor hours = 24,000

Predetermined overhead rate = Total estimated overhead costs/Total estimated direct labor hours

= 380,300/24,000

= $15.8458 per direct labor hour

Overhead cost assigned to fabric case using traditional costing method = Direct labor hours x Predetermined overhead rate

= 15,000 x 15.8458

= $237,687

fabric case was overcosted by the traditional cost system compared to ABC since the overhead charged as per traditional costing system is more than overhead charged as per ABC system.

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