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American Fabrics has budgeted overhead costs of $990,000

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American Fabrics has budgeted overhead costs of $990,000. It has allocated overhead
on a plantwide basis to its two products (wool and cotton) using direct labor hours
which are estimated to be 450,000 for the current year. The company has decided to experiment
with activity-based costing and has created two activity cost pools and related
activity cost drivers. These two cost pools are: cutting (cost driver is machine hours) and
design (cost driver is number of setups). Overhead allocated to the cutting cost pool is
$360,000 and $630,000 is allocated to the design cost pool. Additional information related
to these pools is as follows.

Wool  Cotton  Total
Machine hours  100,000  100,000  200,000
Number of setups  1,000  500  1,500

Instructions
a) Calculate the overhead rates for activity-based costing
b) Determine the amount of overhead allocated to the wool product line and the cotton
product line using activity-based costing.
c) Calculate the overhead rates using the traditional approach
d) What amount of overhead would be allocated to the wool and cotton product lines
using the traditional approach, assuming direct labor hours were incurred
evenly between the wool and cotton?





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