EcoFabrics has budgeted overhead costs of $945,000. 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 $585,000 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
1) Calculate the overhead rate using activity based costing.
2) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.
3) Calculate the overhead rate using traditional approach.
4) What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?