# Traditional Allocation vs Activity Based Costing

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:

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
ABC = \$252

Here is where I'm getting stuck. I'm trying to calculate using the Traditional method:

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.

#### Triest123

VIP Member
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:

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
ABC = \$252

Here is where I'm getting stuck. I'm trying to calculate using the Traditional method:

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.

= Total overhead costs / Total direct labor hours
= \$500,000 / 12,500 hours
= \$40 per hour

• 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. 