Question

Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has 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 company's operations. Direct labor costs Machine hours Setup hours Standard $50,000 1,500 90 Custom $100,000 1,200 390 Total estimated overhead costs are $294,600. Overhead cost allocated to the machining activity cost pool is $189,000, and $105,600 is allocated to the machine setup activity cost pool.

Answer 1

Estimated overhead costs	294600
Divide by Direct labor costs	150000		=50000+100000
Predetermined overhead rate	196.40%	of direct labor cost
Machining	70	per machine hour	=189000/(1500+1200)
Machine setup	220	per setup hour	=105600/(90+390)
Traditional costing
Standard	98200	=50000*196.40%
Custom	196400	=100000*196.40%
Activity based costing
Standard	124800	=(1500*70)+(90*220)
Custom	169800	=(1200*70)+(390*220)