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Exercise 4-3 b3 In your words : EcoFabrics has budgeted overhead costs of $945,000.
Exercise 4-3 b3 In your words :
EcoFabrics has budgeted overhead costs of $945,000. 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 $585,000 is allocated to the design cost pool. Additional information related to these pools is as follows.
Wool
Cotton
Total
Machine hours100,000100,000200,000Number of setups1,0005001,500
The amount of overhead allocated to the wool product line and the cotton product line using activity-based costing & traditional approach is as follows:
Products LineABCTraditionalWool$570,000$472,500Cotton$375,000$472,500
(b3)
How does allocation using traditional approach compare with the amount allocated using ABC?
