Smithson, Inc. decided to implement the activity-based costing approach and was quitesuccessful in its use. However, the controller is wondering if instead of only two activitycost pools, they should expand to three activity cost pools based on the following:(d)Family Model$75,0002,000200Deluxe Model$150,0002,000800Direct labor costsMachine hoursSetup hoursPackaging hours5075The estimated overhead of $450,000 is allocated as follows: machining activity costpool $240,000, machine set up $170,000 and packaging $40,000.(1)Determine the overhead rates using the activity-based costing approach withthree cost pools.Determine the overhead allocation for the family model and the deluxe modelusing three activity cost pools. What is the difference in allocation between twoactivity cost pools and three activity cost pools? Is the difference in allocationworth using the third activity cost pool?(2)

Question
Asked Nov 1, 2019
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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:
(d)
Family Model
$75,000
2,000
200
Deluxe Model
$150,000
2,000
800
Direct labor costs
Machine hours
Setup hours
Packaging hours
50
75
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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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: (d) Family Model $75,000 2,000 200 Deluxe Model $150,000 2,000 800 Direct labor costs Machine hours Setup hours Packaging hours 50 75 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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Expert Answer

Step 1

Activity based costing is a cost allocation method where overhead and indirect cost are allocated on the basis of specific cost pools.

Step 2

Allocation on the basis of 3 Cost pools

Working:

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c D А В Е F G Computation of Overhead Rate Total Cost Family Deluxe Total 170000 1 2 Particulars Cost Driver Rate per driver 3 Machine Set-up Set-up hours 4 Machining 5 Packing Ес3/F3 200 800 D3+E3 C4/F4 C5/F5 Machine Hours 240000 2000 2000 =D4+E4 Packing hours 40000 50 75 =D5+E5 6

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Step 3

ABC Cost Pool- Ove...

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c D E F G Computation of Overhead Rate Total Cost Family Deluxe Total Cost Driver 3 Machine Set-up Set-up hours Machine Hours Packing hours 2 Particulars Rate per driver 800 170000 200 1000 170 4 Machining 5 Packing 2000 4000 2000 240000 60 75 40000 50 125 320 6

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