Answer:
Traditional allocation method
Overhead allocation rate
= Budgeted overhead
Budgeted machine hours
= $1,050,000
50,000 hours
= $21 per machine hour
Overhead allocation
Product A = $21 x 10,000 = $210,000
Product B = $21 x 40,000 = $840,000
Using activity-based costing
Cost driver rates
Machine set-up = $250,000
10,000 set-ups
= $25 per set-up
Assembly = $300,000
60,000 parts
= $5 per part
Machine maintenance = $500,000
50,000 hours
= $10 per machine hour
Overhead allocation based on ABC
A B
$ $
Machine set-up 175,000 75,000
Assembly 125,000 175,000
Machine maintenance 100,000 400,000
Total cost 400,000 650,000
Explanation:
In traditional allocation method, there is need to calculate the overhead allocation rate, which is the ratio of budgeted overhead to budgeted machine hours. Then, the overhead allocation rate will be used to multiply the machine hours for each product in order to obtain the overhead allocated.
In activity-based costing, there is need to calculate the cost driver rates, which is the ratio of overhead of each cost pool to the total cost driver of each cost pool. Then, we will multiply the cost driver rate by the cost driver for each product in order to obtain the allocated overhead.
