Problem:
It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 576,000 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 $460,800 and $806,400 is allocated to the design cost pool. Additional information related to these pools is as follows.
- Wool Cotton Total
- Machine hours 128,000 128,000 256,000
- Number of setups 1,280 640 1,920
Required:
Question: Calculate the overhead rate using activity based costing and then calculate if the traditional approach were used.
Note: Be sure to show how you arrived at your answer.