Q.1 Fanta Company has budgeted overhead costs of $1,040,000. It has allocated overhead
on a plantwide basis to its two products (wool and cotton) using direct labor hours which
are estimated to be 520,000 for the current year. The company has decided to experiment
with activity-based costing and has created two activity cost pools and related activity cost
drivers. These two cost pools are: Cutting (cost driver is machine hours) and Design (cost
driver is number of setups). Overhead allocated to the Cutting cost pool is $500,000 and
$540,000 is allocated to the Design cost pool. Additional information related to these pools
is as follows.
Wool Cotton Total
Machine hours 100,000 100,000 200,000
Number of setups 1,000 500 1,500
<Required>
1. Determine the amount of overhead allocated to the wool product line and the cotton
product line using activity-based costing.
2. What is the difference between the allocation of overhead to the wool and cotton product
lines using activity-based costing versus the traditional approach, assuming direct labor
hours were incurred evenly between the wool and cotton?
