TriTech Company has been allocating overhead to individual product lines based on each line’s relative shares of direct labor hours. For the upcoming year, the company estimated that manufacturing overhead will be $1,800,000 and estimated direct labor hours will be 120,000. The company also has the following estimates:
Cost Pool————Cost Driver——–Total Amount———-Total Amount of Activity
Maintenance costs—Direct labor hours——$ 700,000————-120,000
Setup costs————Number of setups——–500,000—————200
Engineering costs—–# of design changes——600,000————–400
Among many other products, TriTech has two switches, Standard and Elite switches. Standard switches are a high-volume product that the company makes in large batches, while Elite switches are a specialty product that is fairly low in sales volume.
Information about Standard and Elite usage of the different activities follows:
Direct labor hours——————-2,000————————–200
Number of setups———————-1——————————14
Number of design changes————1——————————21
a.Calculate the predetermined overhead rate based on direct labor hours (traditional allocation). Use this predetermined overhead rate to calculate the amount of overhead to apply to Standard and Elite switches, based on their usage of direct labor hours.
b.Calculate the individual ABC pool rates by taking the total amount of overhead for each cost pool and dividing that total by the total amount of activity for that pool. Allocate overhead to each of the two products using these three activity rates.
c.Compare the overhead calculated in part a to that calculated in part b. Why are they different? Which allocation method (traditional or ABC) most likely results in a better estimate of product cost?