Problem: The Pikes Peak Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.
Total Budgeted factory overhead cost = $440,000.
|
Products
|
Cutting Direct Labor Hours
|
Sewing Direct Labor Hours
|
Set-Ups
|
QC Inspections
|
Purchase Orders
|
|
Handbags
|
60,000
|
60,000
|
500
|
200
|
100
|
|
Moccasins
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40,000
|
80,000
|
300
|
800
|
300
|
|
Total
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100,000
|
140,000
|
800
|
1,000
|
400
|
|
Budget
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$80,000
|
$240,000
|
$90,000
|
$20,000
|
$10,000
|
Calculate the amount of factory overhead to be allocated to each unit using activity based costing. The factory plans to produce 60,000 handbags, and 40,000 moccasins. Calculate each activity percentage for two products and apply that to the budgeted cost/activity.
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