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		$51,000		$116,000
Machine hours		1,410		1,330
Setup hours		96		400

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $195,000, and $109,000 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

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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

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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

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Saddle
Answer 1
Calculation of Predetermined OH Rate	Standard	Custom	Total	Note
Direct Labor cost	51,000.00	116,000.00	167,000.00	A
Total Manufacturing overhead			304,000.00	B
Predetermined OH Rate			182.04%	C=B/A
Total Allocated OH	92,840.00	211,166.00	304,006.00	D=C*A

Answer 2		E	F	G	H=F+G	I=H/E
Calculation of ABC rates for overhead			Activity usage
Activity cost pool	Activity Measure	Cost	Standard	Custom	Total	ABC rates
Machining activity	Machine hours	195,000.00	1,410.00	1,330.00	2,740.00	71.17
Machine Setups	Number of setups	109,000.00	96.00	400.00	496.00	219.76
Total Cost assigned		304,000.00

Allocation table
Standard		See I	See F	J=F*I
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Machine Setups	Number of setups	71.17	1,410.00	100,350.00
Mixtures	Number of mixtures	219.76	96.00	21,097.00
Total Cost assigned				121,447.00
Deluxe		See I	See G	K=G*I
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Machine Setups	Number of setups	71.17	1,330.00	94,656.00
Mixtures	Number of mixtures	219.76	400.00	87,904.00
Total Cost assigned				182,560.00

Answer 3	Standard	Deluxe	Note
Overhead assigned- Traditional costing	92,840.00	211,166.00	See D
Overhead assigned- ABC	121,447.00	182,560.00	L= J,K
Difference	(28,607.00)	28,606.00	M=D-L