WRITE A MEMO: to the president in a maximum of 500 words in which you explain: (F) What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool?

PART 1:

Dachshund, Inc. produces fancy, high end dog kennels and runs. They have two primary units- a Single model and a Multi Pet model. You are Dachshunds controller, and you have decided to use a plant-wide overhead rate based on direct labor costs. The president of the company recently heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the companys operations:

Total estimated overhead costs are $450,000. Overhead cost allocated to the machining activity cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool.

IN EXCEL:

(a) Compute the overhead rate using the traditional (plantwide) approach.

(b) Compute the overhead rates using the activity-based costing approach.

(c) Determine the difference in allocation between the two approaches.

PART 2: Dachshund, Inc. decided to implement the activity-based costing approach and was successful in its use. However, as the controller you are wondering if instead of only two activity cost pools, they should expand to three activity cost pools based on the following:

Single Model Multi Pet Model

Direct labor costs $75,000 $150,000

Machine hours 2,000 2,000

Setup hours 200 800

Packaging hours 50 75

The estimated overhead of $450,000 is allocated as follows: machining activity cost pool $240,000, machine set up $170,000 and packaging $40,000.

IN EXCEL:

(D) Determine the overhead rates using the activity-based costing approach with three cost pools.

(E) Determine the overhead allocation for the single model and the multi pet model using three activity cost pools.

WRITE A MEMO: to the president in a maximum of 500 words in which you explain:

What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool?