unker makes two types of briefcase fabric and leather The co

unker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow:

Total estimated overhead costs are $315,900, of which $253,500 is assigned to the materials handling cost pool and $62,400 is assigned to the setup cost pool.

Required:
1. Calculate the overhead assigned to the leather case line using the traditional costing system based on direct labor hours. (Do not round intermediate calculations.)



2. Calculate the overhead assigned to the leather case line using ABC.



3. Was the leather case over- or undercosted by the traditional cost system compared to ABC?

Solution

Solution 1:

Estimated overhead cost = $315,900

Estimated direct labor hours = 20000+10000 = 30000

Overhead recovery rate (Traditional costing system) = Esitmated overhead cost / Direct labor hours

= $315,900 / 30000 = $10.53 per hour

Hence overhead to be assigned to Leather case using traditional costing system is $105,300.

Solution 2:

Hence overhead cost assigned to leather case under ABC is $187,590.

Solution 3:

As cost assingend under traditional costing is lower than cost assigned under ABC costing for leather case, hence leather case was undercosted by the traditional cost system as compared to ABC.