Question

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. Custom $100,000 Direct labour costs Machine hours Set-up hours Standard $50,000 500 100 1,000 400 Total estimated overhead costs are $247,500. The overhead cost allocated to the machining activity cost pool is $163,500, and $84,000 is allocated to the machine set-up activity cost pool.

Answer 1

	Traditional costing	Activity-based costing	Difference
Standard	82500	71300	11200
Custom	165000	176200	-11200
Workings:
Activity based costing:
	Activity rates
Machining activity	109	=163500/(500+1000)
Machine set-up activity	168	=84000/(100+400)
Standard:	Costs allocated
Machining activity	54500	=500*109
Machine set-up activity	16800	=100*168
Total	71300
Custom:	Costs allocated
Machining activity	109000	=1000*109
Machine set-up activity	67200	=400*168
Total	176200