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Classic Furniture has budgeted overhead costs of $1,040,000. It has allocated overhead on a plantwide...

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Accounting

Classic Furniture has budgeted overhead costs of $1,040,000. It has allocated overhead on a plantwide basis to its two products (mahogany and walnut) using direct labor hours which are estimated to be 520,000 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are: Cutting (cost driver is machine hours) and Design (cost driver is number of setups). Overhead allocated to the Cutting cost pool is $500,000 and $540,000 is allocated to the Design cost pool. Additional information related to these pools is as follows.

Mahogany

Walnut

Total

Machine hours

100,000

100,000

200,000

Number of setups

1,000

500

1,500

Instructions

(a) Determine the amount of overhead allocated to the mahogany product line and the walnut product line using activity-based costing. (5 marks)

(b) What is the difference between the allocation of overhead to the mahogany and walnut product lines using activity-based costing versus the traditional approach, assuming direct labor hours were incurred evenly between the mahogany and walnut? (6 marks)

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