Slacker Slacks Inc. (SSI) is a high-end clothing manufacturer.SSI makes Slacks® and Sleeks®. As part of a process improvementinitiative, SSI management decided to transition from a traditionalsingle-driver overhead costing system based on direct labor cost(estimated at $60,000) to an activity-based costing system. Indoing so, SSI will trace direct materials and direct labor directlyto products while allocating other costs based on activities.
Cost Object | Estimated Cost | Activity Driver | Estimated Activity |
Machine Setup | $360,000 | Setups | 400 |
Material Handling | $100,000 | Yards of Material | 50,000 |
Utilities (All) | $40,000 | Kilowatt-hours | 40,000 |
The following actual activity relates to the two products.
| Slacks® | Sleeks® |
Units Produced | 4,000 | 20,000 |
Direct Material Cost | $42,000 | $54,000 |
Direct labor cost | $24,000 | $40,000 |
Number of Setups | 300 | 200 |
Yards of Material | 10,000 | 30,000 |
Kilowatt-hours | 16,000 | 25,000 |
Problem: For Slacker Slacks Inc., compute the product cost priorto over/under-applied overhead using the original costing system.Assuming all costs were estimated correctly, by how much isoverhead over/under applied? How much of the over/under appliedoverhead should be allocated to each product?
Problem: For Slacker Slacks Inc., compute the product cost priorto over/under-applied overhead using the activity based costingsystem. Assuming all costs were estimated correctly, by how much isoverhead over/under applied? How much of the over/under appliedoverhead should be allocated to each product?
