Vector Company manufactures a number of different products. In its traditional costing system, overhead costs are allocated based on a predetermined rate. The company recently switched to an activity-based costing system using different cost drivers for each of their two activities. Information is as follows
Predetermined Estimated
Activity Overhead Rate
100,000 $12 per labour hour
Number of designs 6000 $32 per design
Job #16 required 22 labor hours and 3 designs. By how much would this job have been over or undercosted under the traditional costing system?
A. Undercosted by $96
B. Undercosted by $71.09
C. Overcosted by $96
D. Undercosted by $53.76

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Kolawole845 Kolawole845 · Answer 1 · 2020-05-12T04:09:33+02:00

Answer:

Option D is correct

Under costed by $53.76

Explanation:

Using activity based costing, the job would be costed using the different cost driver rates as provided in the question.

Overheads allocated= (12× 22) + (32×3)= 360

Using traditional costing system, the overhead would be charged using direct labor hours only.

Total overheads = (100,000 × 12) + (6000 × 32) =1,392,000

Predetermined overhead absorption rate

= 1,392,000/100,000 labour hours

=$13.92 per hour

Allocated overheads= OAR × labour hours required

= $13.92 × 22 =306.24

Using traditional costing, the job would be under costed by

= 360 - 306.24

=$53.76