Question

Question 31 Elle Inc. makes two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour 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 set-up. Presented below is information related to the company's operations. Direct labour costs Machine hours Set-up hours Standard $50,000 500 100 Custom $100,000 1,000 400 Total estimated overhead costs are $337,500. The overhead cost allocated to the machining activity cost pool is $183,000, and $154,500 is allocated to the machine set-up activity cost pool. (a) Your answer is correct. Calculate the overhead rate using the traditional (plant-wide) approach. Predetermined overhead rate % of direct labour cost SHOW ANSWER LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Attempts: 1 of 2 used (b) Your answer is correct. Calculate the overhead rate using the activity-based costing approach. Cost Pool Overhead Rate 122 per machine hour Machining Machine set-up 309 per set-up hour

Answer 1

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		Traditional Costing (A)	Activity based costing (B)	Difference (A) - (B)
	Standard	$ 1,12,500	$                     91,900	$     20,600
	Custom	$ 2,25,000	$                  2,45,600	$   -20,600
	Workings:
	Traditional Costing
	Standard	=	$50000 X 225%
		=	$                  1,12,500
	Custom	=	$100000 X 225%
		=	$                  2,25,000
	Activity based costing
			Standard	Custom
(i)	Machining	=	500 X $122	1000 X $122
		=	$                     61,000	$ 1,22,000
(ii)	Machine Setup	=	100 X $309	400 X $309
		=	$                     30,900	$ 1,23,600
(i) + (ii)	Total	=	$                     91,900	$ 2,45,600