The following activity and cost information has been compiled.

Number of Number of Number of
Product Setups Components Direct Labour Hours
Standard 3 30 650
Deluxe 7 50 150
Totals 10 80 800
=== === ===

The total overhead costs of £80,000 have been separated out into the following activities:

Equipment set up costs £20,000
Ordering of components £60,000
Total overheads £80,000

Assume a traditional costing system applies and the £80,000 of overhead costs have been allocated based on direct labour hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?

Assume an activity-based costing system is used and that number of setups and number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?

e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

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