My question is, how do you calculate the allocated fixed overhead in Requirement 2? I don't think that my answer is correct.

Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.

Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:

1.Calculate the allocation rates for each cost driver using ABC.

2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.

3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.

1.

activity	total cost	quantity of cost allocation base	overhead allocation rate
order processing	35000	121	289.26
purchasing	36000	53	679.24
material handling	28000	96	291.67
machine setup	14000	136	102.94
production	99000	51	1941.18
assembly	80000	557	143.63
inspecting	11000	210	52.38
shipping	7500	63	119.05

2. Traditional costing

	stick umbrella	collapsible umbrella	Total
Revenues	750,000	42,000	792,000
Direct labor	90,000	4,800	94,800
Direct material	180,000	9,300	189,300
variable overhead	24,000	1,200	25,200
variable selling cost	66,000	3,300	69,300
Total cost	360,000	18,600	468,600
Operating income	390,000	23,400	413,400
operating income %	52	55.71
per unit operating income	6.5	7.8

3. Activity based costing

	stick umbrella	collapsible umbrella
revenues	750,000	42,000
Direct material	180,000	9,300
Direct labor	90,000	4,800
Variable overhead	24,000	2,200
variable selling cost	66,000	3,300
order processing cost	34,711	289
purchasing cost	33,962	2,038
material handling cost	25083	2,917
machine set up cost	13,382	618
production costs	87,353	11,647
assembly cost	75,404	4,596
inspecting cost	10,476	524
shipping cost	7143	357
total costs	647,514	42,586
operating income	102,486	(586)
operating income %	7.68	NIL
per unit operating income	1.7081	NA

4.

cost per unit	stick umbrella	collapsible umbrella
Traditional	12	6.2
ABC	10.79	12.91
difference	1.21	(6.71)

Requirement 1
Activity	Total Costs	Quantity of Cost Allocation Base	Overhead Allocation Rate
Order Processing	$35,000	121	$289.26
Purchasing	$36,000	53	$679.25
Material Handing	$28,000	96	$291.67
Machine Setup	$14,000	136	$102.94
Production	$99,000	51	$1,941.18
Assembly	$80,000	557	$143.63
Inspecting	$11,000	210	$52.38
Shipping	$7,500	63	$119.05
TOTAL	$310,500	1287	$3,619.34
Requirement 2
Traditional Costing
	Stick Umbrella	Collapsible Umbrella	Total
Revenues	$750,000.00	$42,000.00	$792,000.00
Direct Materials	$180,000.00	$9,300.00	$189,300.00
Direct Labor	$90,000.00	$4,800.00	$94,800.00
Variable Overhead	$24,000.00	$1,200.00	$25,200.00
Variable Selling Costs	$66,000.00	$3,300.00	$69,300.00
Allocated Fixed Overhead	$293,370.63	$17,129.37	$310,500.00
Total Costs	$653,370.63	$35,729.37	$689,100.00
Operating Income	$96,629.37	$6,270.63	$102,900.00
Operating Income %	%	%
Per Unit Operating Income	$	$
Requirement 3
Activity-Based Costing
	Stick Umbrella	Collapsible Umbrella	Total
Revenues	$750,000.00	$42,000	$792,000
Direct Materials	$180,000.00	$9,300	$189,300
Direct Labor	$90,000.00	$4,800	$94,800
Variable Overhead	$24,000.00	$1,200	$25,200
Variable Selling Costs	$66,000.00	$3,300	$69,300
Order Processing Costs	$34,710.74	$289.26	$35,000
Purchasing Costs	$33,962.26	$2,037.74	$36,000
Material Handing Costs	$25,083.33	$2,916.67	$28,000
Machine Setup Costs	$13,382.35	$617.65	$14,000
Production Costs	$87,352.94	$11,647.06	$99,000
Assembly Costs	$75,403.95	$4,596.05	$80,000
Inspecting Costs	$10,476.19	$523.81	$11,000
Shipping Costs	$7,142.86	$357.14	$7,500
Total Costs	$287,515	$22,985	$310,500
Operating Income	$462,485	$19,015	$481,500
Operating Income %	%	%
Per Unit Operating Income	$	$
Requirement 4
Costs per Unit	Stick Umbrella	Collapsible Umbrella
Traditional	$	$
ABC	$	$
Difference	$	$
Requirement 5