Question

Waymire Ltd. manufactures two products and currently allocates overhcad based on direct labour hours. For the coming year, the company is considering changing to an activity based costing system by allocating overhead based on 3 activities. The estimated amount of overhead traceable to the 3 activities for the coming year are given below Activity Purchase orders Maintenance Machine Cost driver Cost #oforders $873069 347 Product I Product 2 599 19282 2198 $448164 18218 hours Inspection #of S704819 1736 inspections Total estimated direct labour hours for the coming year are 27302 hours for Product 1 and 80250 hours for Product 2 What is the difference between total overhead allocated to Product 2 using activity based costing versus traditional costing? Note: a negative number indicates less total overhead allocated using activity based costing. Select one a. $334684 b. $-848996 c. $-334684 d. $-662744

Answer 1

Activity	Cost	Total activity	Activity rate	X Activity for Product 2	Overhead allocated to Product 2
Purchase orders	873069	946	922.91	599	552821
Maintenance	448164	37500	11.95	19282	230440
Inspection	704819	3934	179.16	2198	393796
Total	2026052				1177056
Traditional costing:
Total overhead	2026052
Divide by Total labor hours	107552	=27302+80250
Overhead rate	18.84
X Product 2 hours	80250
Overhead allocated	1511740
Difference = 1177056-1511740 = $-334684
Option C is correct