E4.3 (LO 1, 2), AN EcoFabrics has budgeted overhead costs of $945,000. It has assigned overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 450,000 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 $360,000, and $585,000 is allocated to the design cost pool. Additional information related to these pools is as follows.

Assign overhead using traditional costing and ABC.

Wool

Cotton

Total

Machine hours

100,000

100,000

200,000

Number of setups

1,000

500

1,500

Instructions

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

b. What amount of overhead would be assigned to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton? How does this compare with the amount assigned using ABC in part (a)?

(I need explanation )