Chapter 4, Problem 1ME

To determine

Concept introduction:

Activity Based Costing (ABC):

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Predetermined Overhead allocation rate:

The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.

The formula to calculate the Predetermined Overhead allocation rate is as follows:

$PredeterminedOverheadallocationrate=\frac{TotalEstimatedoverheadcost}{TotalEstimatedallocationbase}$

To indicate:

The reason for difference in product costs under traditional and ABC method