PA11.

LO 6.4Lampierre makes brass and gold frames. The company computed this information to decide whether to switch from the traditional allocation method to ABC:

The estimated overhead for the material cost pool is estimated as $12,500, and the estimate for the machine setup pool is $35,000. Calculate the allocation rate per unit of brass and per unit of gold using:

The traditional allocation method

The activity-based costing method

Using Traditional allocation method

Allocation rate per unit

= Budgeted overhead

Budgeted direct labour hours

Brass

Overhead allocation rate

= $47,500

700 hours

= $67.86 per direct labour hour

Gold

= $47,500

1,200 hours

= $39.58 per direct labour hour

Using activity-based costing

Brass

Allocation rate for material cost pool

= $12,500

400

= $31.25 per material moved

Gold

Allocation rate for material cost pool

= $12,500

100

= $125 per material moved

Brass

Allocation rate for machine set-up pool

= $35,000

400

= $87.50

Gold

Allocation rate for machine set-up pool

= $35,000

600

= $58.33

Explanation:

Using traditional allocation method, the overheads for material cost pool and machine set-up pool will be added. The overhead allocation rate per unit is the division of total overhead by the direct labour hours for each product.

Using activity-based costing, the material cost pool overhead will be divided by the material moved for each product in order to obtain allocation rate for each product.

The allocation rate for machine set-up pool is obtained by dividing the machine set-up overhead by the number of machine set-up for each product.