Question

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

	Material Handling	Machine Setup	Insertion of Parts	Total
Overhead costs	\) 45,000	\( 136,000	\) 540,000	$ 721,000
Allocation base	Number of parts	Number of setups	Number of parts
Expected usage:
Basic Model	32 parts per calculator	24 setups per year	32 parts per calculator
Professional Model	58 parts per calculator	44 setups per year	58 parts per calculator

Requirement 2

Compare your answers for Exercise E19-15, Exercise E19-16, and Exercise E19-17. What conclusions can you draw?

Short answer

By making a comparison of each method it can be noticed that the activity allocation method computes the almost accurate value for allocation.

Step-by-step solution

Step-by-Step-SolutionStep 1: Comparison table for overhead allocation under each method

	Basic Model	Professional Model	Total Overhead
Single plantwide overhead allocation	$322,000	$399,000	$721,000
Departmental overhead allocation	$243,500	$477,500	$721,000
Activity-based allocation	$256,000	$465,000	$721,000

Conclusion

By looking at the above comparison table it can be noticed that under the single plant-wide allocation method the overhead allocation is almost equal. This is because only a single allocation base has been used irrespective of the other activities level. This allocation method is quite simple but does not look fair as one product may be allocated cost for the lesser-used activities.

Under the departmental allocation method, there is a quiet difference between the overheads for the two models. This method seems fair as the cost to each model has been allocated based on the department activity for each model. This is a fair method but may not be the most accurate as the activity level may be different under each department for each model.

In the last method, activity allocation is the most accurate method to allocate overhead as each product gets allocated cost for the volume of each activity performed on it.

By comparing the overhead allocation under each method it can be noticed that the activity allocation of overhead lies in the middle of the values under the other two methods.