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.

		Standard		Custom
Direct labor costs		$40,000		$110,000
Machine hours		1,450		1,460
Setup hours		103		370

Total estimated overhead costs are $295,000. Overhead cost allocated to the machining activity cost pool is $196,000, and $99,000 is allocated to the machine setup activity cost pool.

Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.)

Predetermined overhead rate

enter the predetermined overhead rate in percentages of direct labor cost rounded to 2 decimal places

% of direct labor cost

eTextbook and Media

  

  

Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.)

Machining		$enter a dollar amount per machine hour rounded to 2 decimal places	per machine hour
Machine setup		$enter a dollar amount per setup hour rounded to 2 decimal places	per setup hour

eTextbook and Media

  

  

Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)

Traditional costing
Standard		$enter a dollar amount rounded to 0 decimal places
Custom		$enter a dollar amount rounded to 0 decimal places
Activity-based costing
Standard		$enter a dollar amount rounded to 0 decimal places
Custom		$enter a dollar amount rounded to 0 decimal places

Answer 1

1
Total estimated overhead	295000
Divide by Total Direct labor costs	150000	=40000+110000
Predetermined overhead rate	196.67	% of direct labor cost
2
Machining	67.35	per machine hour	=196000/(1450+1460)
Machine setup	209.30	per setup hour	=99000/(103+370)
3
Traditional costing:
Standard	78668	=40000*196.67%
Custom	216337	=110000*196.67%
Activity-based costing :
Standard	119215 or 119216	=(1450*67.35)+(103*209.30)
Custom	175772	=(1460*67.35)+(370*209.30)