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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 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. (a) (b) (c) 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. 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 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. (a) (b) (c) 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.

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter4: Activity-based Costing
Section: Chapter Questions
Problem 5CE: Roberts Company produces two weed eaters: basic and advanced. The company has four activities:...
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CASE 1 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 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. (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach. Determine the difference in allocation between the two approaches. (c) Smithson, Inc. decided to implement the activity-based costing approach and was quite successful (d) 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: Family Model $75,000 Deluxe Model $150,000 2,000 800 Direct labor costs Machine hours 2,000 Setup hours Packaging hours 200 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 S40,000. (1) Determine the overhead rates using the activity-based costing approach with three cost pools. (2) 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?
Transcribed Image Text:CASE 1 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 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. (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach. Determine the difference in allocation between the two approaches. (c) Smithson, Inc. decided to implement the activity-based costing approach and was quite successful (d) 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: Family Model $75,000 Deluxe Model $150,000 2,000 800 Direct labor costs Machine hours 2,000 Setup hours Packaging hours 200 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 S40,000. (1) Determine the overhead rates using the activity-based costing approach with three cost pools. (2) 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?
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