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24 October, 01:12

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.)

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Answers (1)
  1. 24 October, 01:31
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    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.
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