Question

Local Fabric produces tow products: wool and cotton. Company uses direct labor hours to allocate overhead cost to its products. The company decided to experiment with activity-based costing system 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). Additional information is provided below: Wool Cotton Total Overhead cost per year Machine hours Number of setups Direct labor hours 500 2.550 4,000 625 2,295 5,400 1,125 4,845 9,400 Cutting Design Total 20,000 24,000 44,000 1) Determine the amount of overhead allocated to each product using traditional costing system and direct labor hours as allocation base 2) Determine the amount of overhead allocated to each product using ABC system 3) By what amount traditional system undercost or overcost wool product? Round to 2 decimals