Number 4 Smithson, Inc. produces two types of gas grills: a family model and a deluxe model. Smithson's controller has decided to use a plantwide overhead rate based on direct labor costs The president of the company recently 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 information related to the company's operations: Family Model $75,000 2,000 200 Deluxe Model $150,000 2,000 800 Direct labor costs Machine hours Setup hours cton Total estimated overhead costs are $450,000. Overhead cost allocated to the machining activity cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool Instructions Compute the overhead rate using the traditional (plantwide) approach. Compute the overhead rates using the activity-based costing approach. Determine the difference in allocation between the two approaches. Smithson, Inc. decided to implement the activity-based costing approach and was quite successful in its use. However, the controller is wondering if instead of only two activity cost pools, they should expand to three activity cost pools based on the following: (a) (b) (c) Deluxe Model $150,000 2,000 800 Family Model $75,000 2,000 200 Direct labor costs Machine hours Setup hours Packaging hours 75 50 The estimated overhead of $450,000 is allocated as follows: machining activity cost pool $240,000, machine set up $170,000 and packaging $40,000. (1) Determine the overhead rates using the activity-based costing approach with three cost pools. Determine the overhead allocation for the family model and the deluxe model using three activity cost pools. What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool? (2)

Question
Number 4
Smithson, Inc. produces two types of gas grills: a family model and a deluxe model. Smithson's
controller has decided to use a plantwide overhead rate based on direct labor costs The
president of the company recently 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 information related to the company's
operations:
Family Model
$75,000
2,000
200
Deluxe Model
$150,000
2,000
800
Direct labor costs
Machine hours
Setup hours
cton
Total estimated overhead costs are $450,000. Overhead cost allocated to the machining
activity cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool
Instructions
Compute the overhead rate using the traditional (plantwide) approach.
Compute the overhead rates using the activity-based costing approach.
Determine the difference in allocation between the two approaches.
Smithson, Inc. decided to implement the activity-based costing approach and was quite
successful in its use. However, the controller is wondering if instead of only two activity
cost pools, they should expand to three activity cost pools based on the following:
(a)
(b)
(c)
Deluxe Model
$150,000
2,000
800
Family Model
$75,000
2,000
200
Direct labor costs
Machine hours
Setup hours
Packaging hours
75
50
The estimated overhead of $450,000 is allocated as follows: machining activity cost
pool $240,000, machine set up $170,000 and packaging $40,000.
(1)
Determine the overhead rates using the activity-based costing approach with
three cost pools.
Determine the overhead allocation for the family model and the deluxe model
using three activity cost pools. What is the difference in allocation between two
activity cost pools and three activity cost pools? Is the difference in allocation
worth using the third activity cost pool?
(2)
Expand
Transcribed Image Text

Number 4 Smithson, Inc. produces two types of gas grills: a family model and a deluxe model. Smithson's controller has decided to use a plantwide overhead rate based on direct labor costs The president of the company recently 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 information related to the company's operations: Family Model $75,000 2,000 200 Deluxe Model $150,000 2,000 800 Direct labor costs Machine hours Setup hours cton Total estimated overhead costs are $450,000. Overhead cost allocated to the machining activity cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool Instructions Compute the overhead rate using the traditional (plantwide) approach. Compute the overhead rates using the activity-based costing approach. Determine the difference in allocation between the two approaches. Smithson, Inc. decided to implement the activity-based costing approach and was quite successful in its use. However, the controller is wondering if instead of only two activity cost pools, they should expand to three activity cost pools based on the following: (a) (b) (c) Deluxe Model $150,000 2,000 800 Family Model $75,000 2,000 200 Direct labor costs Machine hours Setup hours Packaging hours 75 50 The estimated overhead of $450,000 is allocated as follows: machining activity cost pool $240,000, machine set up $170,000 and packaging $40,000. (1) Determine the overhead rates using the activity-based costing approach with three cost pools. Determine the overhead allocation for the family model and the deluxe model using three activity cost pools. What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool? (2)

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