Exercise 4-1 (Part Level Submission)

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,700, and $106,300 is allocated to the machine setup activity cost pool.

(a)

Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)

Predetermined overhead rate

[removed]

% of direct labor cost

(b)

Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. $12.25.)

Machining		$[removed]	per machine hour
Machine setup		$[removed]	per setup hour

(c)

Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. $1,225.)

Traditional costing
Standard		$[removed]
Custom		$[removed]
Activity-based costing
Standard		$[removed]
Custom		$[removed]

(a)

For each product line, compute operating income using the traditional costing system.

Product 540X		$[removed]
Product 137Y		$[removed]
Product 249S		$[removed]

(b)

For each product line, compute operating income using the activity-based costing system.

Product 540X		$[removed]
Product 137Y		$[removed]
Product 249S		$[removed]

(c)

Using the following formula, compute the percentage difference in operating income for each of the product lines of Ayala: [Operating Income (ABC) – Operating Income (traditional cost)] ÷ Operating Income (traditional cost). (Round answers to 2 decimal places, e.g. 12.25%. If difference is negative enter with either a – sign or in parenthesis, e.g. -12.25% or (12.25))

Product 540X		[removed]	%
Product 137Y		[removed]	%
Product 249S		[removed]	%

(a)

Calculate the overhead rate using activity based costing and then calculate if the traditional approach were used. (Round answers to 2 decimal places, e.g. $12.25.)

Overhead rates for activity-based costing
Cutting		$[removed]	per machine hour
Design		$[removed]	per setup
Overhead rates using the traditional approach		$[removed]	per direct labor hour

(b)

(1) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

		Wool product line	Cotton product line
Overhead Allocated		$[removed]	$[removed]

(2) What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

		Wool product line		Cotton product line
Overhead Allocated		$[removed]		$[removed]

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

(a)

Compute the activity-based overhead rates for each of the three cost pools. (Round the supervision overhead rate to 2 decimal places, e.g. 12% and all other answers to 2 decimal places, e.g. $12.25.)

		Overhead Rate
Scheduling and travel		$[removed]
Setup time		$[removed]
Supervision		[removed]	%

(b)

Determine the overhead cost assigned to each product line. (Round Overhead Rate to 2 decimal places, 15.25 and final answers to 0 decimal places, e.g. $2,512.)

		Commercial		Residential
Scheduling and travel		$[removed]		$[removed]
Setup time		$[removed]		$[removed]
Supervision		$[removed]		$[removed]
Total assigned costs		$[removed]		$[removed]

(c)

Compute the operating income for each product line, using the activity-based overhead rates. (Round answers to 0 decimal places, e.g. $2,512.)

		Commercial		Residential
Operating income		$[removed]		$[removed]