Reference no: EM133106623

Question 1 - Domestic Fabrics has budgeted overhead costs of $955,000. It has assigned overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 477,500 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are Cutting (cost driver is machine hours) and Design (cost driver is number of setups). Overhead allocated to the Cutting cost pool is $400,000, and $555,000 is allocated to the Design cost pool. Additional information related to these pools is as follows.

Assign overhead using traditional costing and ABC.

Required -

a. Determine the amount of overhead assigned to the wool product line and the cotton product line using activity-based costing.

b. What is the difference between the allocation of overhead to the wool and cotton product lines using activity-based costing versus the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

Question 2 - Organic Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration (FDA) requirements and to assure its customers of safe, sanitary, and nutritious food, Organic engages in a high level of quality control. Organic assigns its quality-control overhead costs to all products at a rate of 20% of direct labor costs. Its direct labor cost for the month of June for its low-calorie dessert line is $55,000. In response to repeated requests from its financial vice president, Organic management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows.

Assign overhead using traditional costing and ABC; classify activities as value- or non-value-added.

Required -

a. Compute the quality-control overhead cost to be assigned to the low-calorie dessert product line for the month of June using (1) the traditional product costing system (direct labor cost is the cost driver), and (2) activity-based costing.

b. By what amount does the traditional product costing system undercost or overcost the low-calorie dessert line?

c. Classify each of the activities as value-added or non-value-added.

Question 3 - Assign overhead and compute unit costs.

Spreadwell Paint Company manufactures two high-quality base paints: an oil-based paint and a latex paint. Both are housepaints and are manufactured only in a neutral white color. Spreadwell sells the white base paints to franchised retail paint and decorating stores where pigments are added to tint (color) the paint as the customer desires. The oil-based paint is made with organic solvents (petroleum products) such as mineral spirits or turpentine. The latex paint is made with water; synthetic resin particles are suspended in the water, and dry and harden when exposed to air.

Spreadwell uses the same processing equipment to produce both paints in different production runs. Between batches, the vats and other processing equipment must be washed and cleaned.

After analyzing the company's entire operations, Spreadwell's accountants and production managers have identified activity cost pools and accumulated annual budgeted overhead costs by pool as follows.