Simpson Co currently manufactures easy chairs and recliners

Simpson Co. currently manufactures easy chairs and recliners. It currently uses a traditional costing system with direct labor hours as the activity to allocate overhead costs to both products. Simpson’s total overhead costs are $40,000. The total direct labor hours are 5,000 (2,700 hrs. for easy chairs and 2,300 for recliners). Management is considering switching to the ABC system and has identified the following activities and related drivers: Activities Driver Estimated Overhead Total Expected Use of Drivers Expected Use of Drivers by Product Easy Chairs Recliners Machine Setups # of setups $17,500 1,000 700 300 Inspections # of inspections $22,500 750 600 150 $40,000 Under a TRADITIONAL costing system, the predetermined overhead rate would be $ PER HOUR and the TOTAL Overhead Assigned to EASY CHAIRS would be $ .

Solution

Under traditional costing system :

Predetermine overhead rate = 40000/5000 = 8 per labour hour

Total overhead assigned to easy chairs = 2700*8 = $21600