Solution:
a) Under traditional costing method, Factory Overhead is calculated to allocate the factory overhead to product or job order.
Factory Overhead Rate (FOR)
– Factory Overhead Rate is the predetermined overhead rate which is used to apply manufacturing overhead to production department or products or job orders.
– Normally, it is calculated at the beginning of the period.
– It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).
– Allocation bases may be direct labor hours, direct labor costs, machine hours etc.
Mathematically, FOR is calculated as follows:
Factory Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base
Allocation base is Machine Hours in the question.
Hence,
Factory Overhead Rate = Estimated Manufacturing Overhead Cost $480,000 / Estimated Machining Hours 5,000 Hours
= $96 per machine hour
Assigned Overhead to Product EX-1 = Machine Hours Use for Product EX-1 1,000 hours X Factory Overhead Rate $96 per MH
= $96,000
Assigned Overheads to Product EX-1 using traditional costing system = $96,000
b) Calculation of assigned overhead to Product EX-1 (using Activity Based Costing)
Under Activity Based Costing, overheads are calculated on the basis of activity performed in a year by the departments. We need to calculate first Cost per unit of cost driver.
Calculation of Cost Per Unit of Cost Driver
| Activities |
Cost/year |
Cost Driver |
Consumption of Cost Driver per year |
Cost per unit of Cost Driver (Cost per year / Consumption of Cost Driver Per Year) |
| Setups |
$30,000 |
Number of Setups |
40 Setups |
$750.00 |
| Machining Costs |
$330,000 |
Machining Hours |
5000 Hours |
$66.00 |
| Packing costs |
$120,000 |
Orders packed |
500 Orders |
$240.00 |
| Total |
$480,000 |
|
|
|
Calculation of Overhead Assigned to Product EX-1
| Activity |
Cost per unit of Cost Driver (as calculated above) |
Consumption of activity by Product EX-1 per year |
Assigned Overhead Costs to Product EX-1 |
| Setups |
$750.00 |
20 |
$15,000 |
| Machining Costs |
$66.00 |
1000 |
$66,000 |
| Packing costs |
$240.00 |
150 |
$36,000 |
| TOTAL |
|
|
$117,000 |
Assigned Overheads to Product EX-1 using activity based costing = $117,000
