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Unformatted text preview: Exercises: Set B 1 EXERCISES E4-1B Colt Inc. has two types of handbags: standard and custom.The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity- based costing and wants to see how the results would differ if this system were used.Two activity cost pools were developed: machining and machine setup. Presented below is information re- lated to the companys operations. Standard Custom Direct labor costs $50,000 $100,000 Machine hours 1,000 1,000 Setup hours 100 400 Total estimated overhead costs are $270,000. Overhead cost allocated to the machining activity cost pool is $170,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach. (c) Determine the difference in allocation between the two approaches. E4-2B Renfro Inc. has conducted the following analysis related to its product lines, using a tradi- tional costing system (volume-based) and an activity-based costing system. Both the traditional and the activity-based costing systems include direct materials and direct labor costs. Total Costs Products Sales Revenue Traditional ABC Product 440X $200,000 $60,000 $50,000 Product 137Y 160,000 50,000 35,000 Product 249S 80,000 15,000 40,000 Instructions (a) For each product line, compute operating income using the traditional costing system. (b) For each product line, compute operating income using the activity-based costing system. (c) Using the following formula, compute the percentage difference in operating income for each of the product lines of Renfro: Operating Income (ABC) Operating Income (tradi- tional cost) Operating Income (traditional cost). (Round the percentage to two decimals.) (d) Provide a rationale as to why the costs for Product 440X are approximately the same using either the traditional or activity-based costing system. E4-3B American Fabrics has budgeted overhead costs of $900,000. 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 $540,000 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) Determine the amount of overhead allocated to the wool product line and the cotton prod- uct line using activity-based costing....
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- Spring '10