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Question - The Pikes Peak Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.
Total Budgetted factory overhead cost = $440,000.
Products
Cutting Direct Labor Hours
Sewing Direct Labor Hours
Set-Ups
QC Inspections
Purchase Orders
Handbags
60,000
500
200
100
Moccasins
40,000
80,000
300
800
Total
100,000
140,000
1,000
400
Budget
$80,000
$240,000
$90,000
$20,000
$10,000
Calculate the amount of factory overhead to be allocated to each unit using activity based costing. The factory plans to produce 60,000 handbags, and 40,000 moccasins. Calculate each activity percentage for two products and apply that to the budgeted cost/activity.
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