International Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on a plant-wide basis to its two products (wool and cotton) using direct labour 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 (the cost driver is machine hours) and design (the cost driver is the number of set-ups). 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 labour hours were incurred evenly between the wool and cotton?

Transcribed Image Text:

Machine hours Number of set-ups Wool 100,000 Cotton 100,000 500 Total 200,000 1,000 1,500