Homework SourseWaymire Ltd manufactures two products and currently allocate
Waymire Ltd. manufactures two products and currently allocates overhead based on direct labour hours. For the coming year, the company is considering changing to an activity based costing system by allocating overhead based on 3 activities. The estimated amount of overhead traceable to the 3 activities for the coming year are given below:
Activity
Cost driver
Cost
Product 1
Product 2
Purchase orders
# of orders
$840347
312
579
Maintenance
Machine hours
$456759
18555
19721
Inspection
# of inspections
$718649
1526
2200
Total estimated direct labour hours for the coming year are 33444 hours for Product 1 and 84234 hours for Product 2.
What is the difference between total overhead allocated to Product 2 using activity based costing versus traditional costing? Note: a negative number indicates less total overhead allocated using activity based costing.
| Activity | Cost driver | Cost | Product 1 | Product 2 |
| Purchase orders | # of orders | $840347 | 312 | 579 |
| Maintenance | Machine hours | $456759 | 18555 | 19721 |
| Inspection | # of inspections | $718649 | 1526 | 2200 |
Solution
Overhead Under Activity based costing
[Note 1 - Cost Per Driver = Cost / Total
Note 2 - Cost for Product 1 = Cost Per Driver x Product 1
Note 3 - Cost for Product 2 = Cost Per Driver x Product 2 ]
Overhead Under Traditional Costing (Based on Direct Labour Hours)
Total Overhead Cost = $2,015,755
Labour Hours of Product 1 = 33444 hours
Labour Hours of Product 2 = 84234 hours
Total Labour Hours = 117678 hours
Overhead Cost Per hour = $2,015,755 / 117678 hours = $17.13 (Approx)
Overhead Cost of Products = No of Labour hours x Cost per Hour
Difference between total overhead allocated to Product 2 using activity based costing versus traditional costing =
| Activity | Cost Drivers | Cost | Product 1 | Product 2 | Total | Cost Per Driver {Note 1} | Cost for Product 1 {Note 2} | Cost for Product 2 {Note 3} |
| Purchase orders | # of orders | $840,347 | 312 | 579 | 891 | $943.15 | $294,262.92 | $546,084.08 |
| Maintenance | Machine hours | $456,759 | 18555 | 19721 | 38276 | $11.93 | $221,422.39 | $235,336.61 |
| Inspection | # of inspections | $718,649 | 1526 | 2200 | 3726 | $192.87 | $294,325.92 | $424,323.08 |
| Total Cost | $2,015,755 | $810,011.23 | $1,205,743.77 |
