Question

Question 10 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. Standard Custom $50,000 Direct labor costs Machine hours Setup hours 1,200 $100,000 1,200 420 90 Total estimated overhead costs are $299,100. Overhead cost allocated to the machining activity cost pool is $192,000, and $107,100 is allocated to the machine setup activity cost pool. (a) Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate % of direct labor cost

Answer 1

		Total estimated Oh cost / Total Direct Labor cost
	=	$ 299100 / $ 150000
	=	1.99	% of direct labor cost

OH rates using ABC approach
Machining =		$ 192000 / 2400
	=	$   80.00
Machine setup =		$ 107100 / 510
	=	$ 210.00

Traditional Costing
Standard		$   99,700.00	($ 50000 x 1.99%)
Custom		$ 199,400.00	($ 100000 x 1.99%)
		$ 299,100.00
Activity Based Costing
		Machining	Workings	Setup Hrs	Workings	Total
Standard		$   96,000.00	($ 80 x 1200)	$ 96,000.00	($ 80 x 1200)	$ 192,000.00
Custom		$   18,900.00	($ 210 x 90)	$ 88,200.00	($ 210 x 420)	$ 107,100.00
						$ 299,100.00

Is this correct?