St. james, inc., currently uses traditional costing procedures, applying $800,000 of overhead to products beta and zeta on the basis of direct labor hours. the company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (dlh), production setups (su), and number of parts components (pc) as cost drivers. data on the costs pools and respective driver volumes follow:

pool no. 1 pool no. 2 pool no. 3

product (driver: dlh) (driver: su) (driver: pc)

beta 1,200 45 2,250

zeta 2,800 55 750

pool cost $160,000 $280,000 $360,000

1. the overhead cost allocated to beta by using traditional costing procedures would be:

a. $240,000

b. $356,000

c. $444,000

d. $560,000

2. the overhead cost allocated to zeta by using traditional costing procedures would be:

a. $240,000

b. $356,000

c. $444,000

d. $560,000

3. the overhead cost allocated to beta by using activity-based costing procedures would be:

a. $240,000

b. $356,000

c. $444,000

d. $560,000

4. the overhead cost allocated to zeta by using activity-based costing procedures would be:

a. $240,000

b. $356,000

c. $444,000

d. $560,000

The overhead cost allocated to Beta using traditional costing

Overhead allocation rate

= Budgeted overhead

  Budgeted direct labour hours

= $800,000

  4,000 hours

=  $200 per direct labour hour

Overhead allocated to Beta

= $200 x 1,200 hours

=  $240,000

The correct answer is A

2. The total overhead allocated to Zeta using traditional costing

   = $200 x 2,800 hours

   =  $560,000

   The correct answer is D

3. The total overhead allocated to Beta using activity-based costing

      Direct labour hours

         Cost driver rate                                                                                                                                                                                                                                                                                      

      = $160,000

          4,000 hours

      = $40 per direct labour hour

      Set-up

      Cost driver rate

    = $280,000

            100

   = $2,800 per set-up

     Number of parts Components (PU)

     Cost driver rate

     = $360,000

           3,000

    = $120 per pc

    Total overhead allocated

   = $40 x 1,200 + $2,800 x 45 + $120 x 2,250

  = $444,000

   The correct answer is C

4. The total overhead cost allocated to Zeta using activity-based costing

   = $40 x 2,800 + $2,800 x 55 + $120 x 750

  = $356,000

   The correct answer is B                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Explanation:

In traditional costing, overhead allocation rate is total budgeted overhead ($800,000) divided by total budgeted direct labour hours (4,000 hours).

Overhead allocated to each product is calculated as overhead allocation rate multiplied by budgeted hours for each product.

In activity-based costing, cost driver rate is the estimated overhead for each cost pool divided by the total cost driver for each cost pool.

Overhead allocated to each product is the cost driver rate for each cost pool multiplied by the cost driver for each product.

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