Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow: Fabric Case Leather Case Number of labor hours 16,000 8,000 Number of material moves 620 930 Number of setups 40 120 Total estimated overhead costs are $238,800, of which $186,000 is assigned to the materials handling cost pool and $52,800 is assigned to the setup cost pool. Required: 1. Calculate the overhead assigned to the leather case line using the traditional costing system based on direct labor hours. 2. Calculate the overhead assigned to the leather case line using ABC. 3. Was the leather case over- or undercosted by the traditional cost system compared to ABC

1. 79,600

2. 151,200

3.The leather case line is undercosted by the traditional cost system compared to ABC

Explanation:

1. Calculation for the overhead assigned to the leather case line using the traditional costing system based on direct labor hours

Overhead Assigned to leather case =[$238,800/(16,000+8,000)*8,000]

Overhead Assigned to leather case =[$238,800/24,000*8,000]

Overhead Assigned to leather case =79,600

Therefore the overhead assigned to the leather case line using the traditional costing system based on direct labor hours will be 79,600

2. Calculation for the overhead assigned to the leather case line using ABC

First step is to calculate the Material handling rate

Material handling rate = 186,000/(620+ 930)

Material handling rate = 186,000/1,550

Material handling rate = 120 per move

Second step is to calculate the Setup cost

Setup cost =$52,800/(40+ 120)

Setup cost =$52,800/160

Setup cost = 330 per setup

Now let calculate overhead assigned to the leather case line using ABC

Overhead assigned to leather case ABC = (930*120)+(120*330)

Overhead assigned to leather case ABC =111,600+39,600

Overhead assigned to leather case ABC = 151,200

Therefore the overhead assigned to the leather case line using ABC will be 151,200

3. Based on the above calculation the leather case line is undercosted by the traditional cost system compared to ABC

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