PA10.

LO 6.4Carlton’s Kitchen’s three cost pools and overhead estimates are as follows:

Compare the overhead allocation using:

The traditional allocation method

The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

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.