Question: Comparing ABC and Plantwide Overhead Cost Assignments

The Oscuro Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs:

Setting up equipment                     $108,000

Other overhead                             $360,000

Setting up equipment is based on setup hours, and other overhead is based on oven hours. Oscuro produces two products, Fudge and Cookies. Information on each product is as follows:

                                    Fudge                Cookies

Units produced                 2,000              10,000

Setup hours                     1,600                  400

Oven hours                        400                2,000

Required: 1. Calculate the activity rate for (a) setting up equipment and (b) other overhead.

2. How much total overhead is assigned to Fudge using ABC?

3. What is the unit overhead assigned to Fudge using ABC?

4. Now, ignoring the ABC results, calculate the plantwide overhead rate, based on oven hours.

5. How much total overhead is assigned to Fudge using the plantwide overhead rate?

6. Conceptual Connection: Explain why the total overhead assigned to Fudge is different under the ABC system (i.e., using the activity rates) than under the non-ABC system (i.e., using the plantwide rate).