Overhead Allocation - Traditional Versus ABC Method
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St. James, Inc., currently uses traditional costing procedures, applying $1,019,800 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.
Product Pool No.1
(Driver: DLH) Pool No.2
(Driver: SU) Pool No.3
(Driver: PC)
Beta 1,900 50 2,650
Zeta 3,600 55 780
Pool Cost $275,000 $367,500 $377,300
1.
The overhead cost allocated to Beta by using traditional costing procedures would be closest to
2.
The overhead cost allocated to Beta by using activity-based costing procedures would be:
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Solution Summary
This solution illustrates how to allocate overhead using the traditional method and the activity-based costing method.
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1. The overhead cost allocated to Beta by using traditional costing procedures would be closest to $541,384.01.
Allocated overhead = (Direct labor hours for Beta/Total direct-labor hours)*Total overhead to be allocated
Allocated overhead = ...
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