If Blue Company had used activities-based costing (ABC) for allocating overhead to its products, it could have easily identified four activities in the plant. Budgeted overhead for the four activities appears below.

Job cost records at the end of the year show that direct labor personnel worked 9,000 hours. 150 batches were produced during the year for a total of 75,000 units. Show calculations of company overhead using activities-based costing and present revised T-accounts for Work-in-Process, Manufacturing Overhead Allocated, and Cost of Goods Sold. Would operating income increase or decrease (given the same facts in transactions 1 through 11 above) if Blue used activities-based costing for allocating overhead? By how much? What conclusions might Blue Companys management accountants draw once they compared the original income statement with the ABC-based income statement?

machine hours: 75,000

Activity Allocation Base Budgeted Overhead $157,500 Set-up direct labor hours Budgeted Use for each activity 10,500 direct labor hours 75,000 machine- hours 140 batches Forming machine-hours $187,500 batches $84,000 Machine maintenance Inspection Total manufacturing overhead units produced $21,000 70,000 units $450,000 Activity Allocation Base Budgeted Overhead $157,500 Set-up direct labor hours Budgeted Use for each activity 10,500 direct labor hours 75,000 machine- hours 140 batches Forming machine-hours $187,500 batches $84,000 Machine maintenance Inspection Total manufacturing overhead units produced $21,000 70,000 units $450,000