Refer to the data in exercise 7.7. Eric Parker is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department’s four products. He has gathered the following budget information about each product.

Data from exercise 7.7:

Eric Parker has been studying his department’s profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company’s approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,133,500 is based on 45,340 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools.

Required

a. Calculate the total overhead allocated to each component under the traditional method using machine hours as the overhead application base.

b. Calculate the total overhead allocated to each component under activity-based costing.

c. What can you conclude about the costs of the other two products?

Transcribed Image Text:

Driver Usage Component 3F5 Component T76 Machine hours 1,000 10,000 Setups 60 30 Batches 30 8 Pounds of raw materials 20,000 20,000