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. Custom Direct labor costs Standard $50,000 1,200 $100,000 1,200 Machine hours 90 420 Setup hours 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.

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Answer 1

Predetermined OH Rate using Plantwide traditional approach	199.40%
(OH / Direct labor costs)
(299100/150000)
Predetermined OH Rate using activity based costing approach
For Machine Hours:	80
(OH allocated to machining activity / Machine hours)	(192000/2400)
For Machine Setup Hours:	210
(OH allocated to setup activity / Setup hours)	(107100/510)