Question

NEXT CALCULATOR PRINTER VERSION BACK Saddle Inc. has two types of handbags: standard and custom. The controler 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 550,000 $100,000 Machine hours 1,200 1,200 Setup hours 120 390 Total estimated overhead costs are $304,200 Overhead cost allocated to the machining activity cost pool is $192,000, and $112,200 is allocated to the machine setup activity cost pool Compute the overhead rate using the traditional plantwide) approach (Hound answer to 2 decimal places, eg. 12.25.) Predetermined overhead rate of direct laber com Compute the overhead rotes using the activity-based costing approach Machining $ per machine how Machine setup persetup hour Determine the difference in a location between the two approaches Traditional costing Standard Custom Activity-based costing Standard Custom

Answer 1

Answer -

The predetermined overhead rate using the traditional approach is 202.80%

Per machine hour rate under activity based costing is $80 and the machine setup per hour is $220

.

Traditional Costing
Standard	$         101,400
Custom	$         202,800

.

Activity-Based Costing
Standard	$         122,400
Custom	$         181,800

.

Explanation -

Calculation of predetermined overhead rate using the traditional approach -

Traditional Overhead Rate = Estimated Overhead / Direct Labor Costs

Traditional Overhead Rate = $304,200 / $150,000 = 202.80%

Working Note :

Direct Labor Cost = Standard Labor Cost + Custom Labor Cost

Direct Labor Cost = $50,000 + $100,000 = $150,000

.

Calculation of per machine hour rate under activity based costing -

Per Machine Hour = Cost of Machine / Number of Machine Hours

Per Machine Hour = $192,000 / 2,400

Per Machine Hour = $80

.

Calculation of machine set-up per hour under activity based costing -

Per Machine Set-up = Cost of Machine Set-up / Number of Machine Set-up Hours

Per Machine Set-up = $112,200 / 510

Per Machine Set-up = $220

.

Working Notes :

Number of Machine Hours = Standard Machine Hours + Custom Machine Hours

Number of Machine Hours = 1,200 + 1,200 = 2,400

.

Number of Machine Set-up Hours = Standard Machine Set-up Hours + Custom Machine Set-up Hours

Number of Machine Set-up Hours = 120 + 390 = 510

.

Difference in allocation based on Traditional costing -

Details	Standard	Custom
Direct labor cost of Standard
[ 50,000 * 202.80% ]	$    101,400
Direct labor cost of Custom
[ 100,000 * 202.80% ]		$      202,800
Total	$    101,400	$      202,800

.

Difference in allocation based on activity-based costing -

Details	Standard	Custom
Machining :
Machine Hours of Standard
[ 1,200 * 80 ]	$      96,000
Machine Hours of Custom		$         96,000
Machine Setup :
Machine setup of standard [120 * 220]	$      26,400
Machine Setup of Custom [390 * 220]		$         85,800
Total	$    122,400	$      181,800

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