Traditional Allocation vs Activity Based Costing


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Hi, I'm an accounting student and I am having trouble with a homework problem. I hope I am posting this in the right place. If not, I apologize. Here is the problem:

The following cost information is available for a company:

Activity------------------Allocation Base------------Volume of Act.---Overhead Cost
Purchasing--------------Purchase Orders-----------30,000----------------$150,000
Receiving----------------Shipments Received------15,000----------------$60,000
Machine Setups--------Setups-------------------------2,500-----------------$200,000
Quality Control----------Inspections------------------18,000----------------$90,000

Direct materials are $15 per unit for luxury hand-bags and $11 per unit for the deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour.

Required
Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing. Calculate the overhead rates for each method.

Check Figures
Traditional = $320
ABC = $252

Here is where I'm getting stuck. I'm trying to calculate using the Traditional method:
Overhead= (total overhead costs/cost driver)

Total overhead costs:
Listed OH costs in the table: $500,000 total
+Dir. Labor Costs: 12,500 hrs x $18/hr = $225,000
+Luxury Handbags = $15 x (unknown # sold)
+Deluxe Handbags = $11 x (unknown # sold)

Don't I need to know how many of each bag were sold in order to complete this problem? The number of each bag sold is not provided.
 
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Triest123

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Hi, I'm an accounting student and I am having trouble with a homework problem. I hope I am posting this in the right place. If not, I apologize. Here is the problem:

The following cost information is available for a company:

Activity------------------Allocation Base------------Volume of Act.---Overhead Cost
Purchasing--------------Purchase Orders-----------30,000----------------$150,000
Receiving----------------Shipments Received------15,000----------------$60,000
Machine Setups--------Setups-------------------------2,500-----------------$200,000
Quality Control----------Inspections------------------18,000----------------$90,000

Direct materials are $15 per unit for luxury hand-bags and $11 per unit for the deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour.

Required
Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing. Calculate the overhead rates for each method.

Check Figures
Traditional = $320
ABC = $252

Here is where I'm getting stuck. I'm trying to calculate using the Traditional method:
Overhead= (total overhead costs/cost driver)

Total overhead costs:
Listed OH costs in the table: $500,000 total
+Dir. Labor Costs: 12,500 hrs x $18/hr = $225,000
+Luxury Handbags = $15 x (unknown # sold)
+Deluxe Handbags = $11 x (unknown # sold)

Don't I need to know how many of each bag were sold in order to complete this problem? The number of each bag sold is not provided.

=> The overhead absorption rate
= Total overhead costs / Total direct labor hours
= $500,000 / 12,500 hours
= $40 per hour
 
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That is what was throwing me off. $40 was my original thought. But that doesn't match the check figure of $320. Maybe the check figure is wrong. I felt like I was completely lost. I feel better now that you say that. :)

Thanks for the help.
 

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