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Traditional Versus Activity-Based Costing

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Mathews Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is the information related to the company's operations.

Direct labor costs $50,000 $100,000
Machine hours 1,000 1,000
Setup hours 100 400
Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $200,000, and $100,000 is allocated to the machine setup activity cost pool.
A) Compute the overhead rate using the traditional (plantwide) approach.
B) Compute the overhead rates using the activity-based costing approach.
C) Determine the difference in allocation between the two approaches.

How to set up and calculate ?

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Solution Summary

This solution illustrates how to compute the overhead allocated to two products under the traditional and activity-based approaches.

See Also This Related BrainMass Solution

Kapur Company: traditional vs activity based costing Product S K

Kapur Company manufactures two products: S and K. Manufacturing support costs are estimated to be RM2 million for the current year. Estimated unit cost and production data are as follows:

a. Estimate the manufacturing cost per unit of each product if support costs are assigned to products on the traditional basis of direct labour hours

b. Assume next that the company's manufacturing support costs can be traced to four activities as follows:

Required: Estimate the manufacturing cost per unit of each product if an activity based costing approach is used.

c. A prospective customer has requested a bid on a two year contract to purchase 1,000 units of Product S every month. Kapur Company has a policy of adding a 25% mark-up to the full manufacturing cost to determine the bid price.

i) What is the bid price when the traditional costing basis is used?

ii) What is the bid price when the activity based costing approach is used?

iii) Explain your answers in parts (i) and (ii) above.

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