Activity Based versus Traditional Costing
Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor hours, but the controller has recommended an activity based costing system using the following data:
|
Cost Driver Volume |
||||
|
Activity |
Cost Driver |
Cost |
Pencils |
Pens |
|
Setting up |
Number of setups |
$ 80,000 |
20 |
30 |
|
Inspecting |
Number of parts |
24,000 |
4 |
6 |
|
Packing and shipping |
Number of boxes shipped |
48,000 |
45,000 |
75,000 |
|
Total overhead |
$152,000 |
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Required
a. Compute the amount of overhead to be allocated to each product under activity based costing.
b. Compute the amount of overhead to be allocated to each product using labor hours as the allocation base. Assume that the number of labor hours required to assemble each box is 0.1 for pencils and 0.2 for pens and that 45,000 boxes of pencils and 75,000 boxes of pens were produced during the period.
c. Should the company follow the controller’s recommendations?