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)

Question
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)

Image Transcription

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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