Domestic Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 477,500 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 $400,000, and $555,000 is allocated to the Design cost pool. Additional information related to these pools is as follows.

Instructions

(a) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

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

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Machine hours Number of setups Wool 100,000 1,000 Cotton 100,000 500 Total 200,000 1,500