please answer both a and b Kustom Kar Parts expects to incur

please answer both a and b

Kustom Kar Parts expects to incur $480,000 in overhead costs in its three main production departments this year: setup costs ($30,000), machining costs ($330,000), and packing costs ($120,000) to make two models of their exhaust systems. The setup department expects to perform 40 setups per year, the machining department expects to work 5,000 hours per year, and the packing department expects to pack 500 orders per year. Manufacturing information about Kustom\'s two exhaust system models follows: 3. EX-1 EX-2 Total Expected Use Number of setups Machining hours Orders packed Number of products manufactured 20 4,000 350 400 of Cost Drivers 40 5,000 500 1,000 1,000 150 600 a. If Kustom Kar Parts use a traditional costing method for applying overhead costs to production, how much overhead would be assigned to Product EX-1 each year assuming the use of machining hours as an application base? b. Using Activity Based Costing, how much overhead would be assigned to Product EX-1 each year, assuming the expected use of cost drivers for EX-1?

Solution

a) Overhead allocation rate using machine hours under traditional costing

Overhead allocation rate = Total overhead costs / total machine hours

= 480000 / 5000

= $96

Overheads assigned to product EX-1 each year = allocation rate * number of machine hours used

= 96*1000

= $96,000

b) Acitivity based costing. First we calculate the overhead rates for all the cost drivers

Overheads assigned to product EX-1

	Set up	Machine	Packing
Overhead costs	$30,000	$3,30,000	$1,20,000
Drivers	40	5,000	500
Overhead allocation rate	$750	$66	$240