Franklin Company produces commercial gardening equipment Sin

Franklin Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow:

Production of 900 sets of cutting shears, one of the company’s 20 products, took 180 labor hours and 7 setups and consumed 15 percent of the product-sustaining activities.

Required

A) Had the company used labor hours as a company wide allocation base, how much overhead would it have allocated to the cutting shears?

B) How much overhead is allocated to the cutting shears using activity-based costing?

C) Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 900 units are produced. If direct product costs are $200 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system?

Solution

Solution A:

Total estimated overhead = $66,700 + $23,970 + $12,000 + $288,000 = $390,670

Estimated direct labor hours = 2900 labor hours

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours = $390,670 / 2900 = $134.7138 per labor hours

Overhead allocated to cutting shears = 180 * $134.7138 = $24,248

Solution B:

Solution c:

Overhead cost per unit - using ABC = $23,910 / 900 = $26.57 per unit

Overhead cost per unit - using direct labor hours for allocation = $24,248 / 900 = $26.94