Activity-Based versus Traditional Costing ;

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:

Required

a. Compute the amount of overhead to be allocated to each product under activity-based costing.

b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.1 for pencils and 0.2 for pens and that 45,000 boxes of pencils and 75,000 boxes of pens were produced.

c. Should the company follow the controller’s recommendations?

Transcribed Image Text:

Cost Driver Volume Activity Setting up Inspecting Cost Driver Cost Pencils Pens Number of setups $100,000 20 30 Number of parts 30,000 4 6 Packing and shipping Total overhead Number of boxes shipped 60,000 45,000 75,000 $190,000