Question

per product, 2680-5062-7-7-70064edussesment1045-848-47--0- 5 64827 6 Saddle Inc. has two types of handbags standard son. The controller has decided to use apawide overhead rate based on direct labor costs. The president has heard of system were used. The activity.com pools were developed machining and maine s a Presented below as information to company's open the casting and wants to see how the results would for the Standard Cox $0.00 $120.000 Direct labor costs Machine hours 1300 140 Total estimated overhead costs $29.000. Overhead stad i g is $19.00 . t o ol Compute the overhead rate using the traditional artwielorach und 12.) Predetermined overhead rate Textbook and Media Compute th a t the activity becoming and Method Media Sundard

Answer 1

Overhead rate using traditional approach

Predetermined overhead rate = ( Total estimated overhead rate / Total direct labor costs ) * 100 = $296,000 / ($60,000 + $120,000) * 100 = 164.44 % of direct labor cost.

Overhead rates using activity based costing approach

Overhead rate for machining = Overhead allocated to machining activity cost pool / Total machine hours = $198,000 / ( 1,300 + 1,140 ) = $81.15 per machine hour.

Overhead rate for machine setup = Overhead allocated to machine setup activity cost pool / Total machine setup hours = $98,000 / ( 107 + 420 ) = $185.96 per machine setup hour.

Difference in allocation between two approaches

Traditional costing

Standard = Predetermined overhead rate * Direct labor costs of Standard = 164.44% * $60,000 = $98,664

Custom = Predetermined overhead rate * Direct labor costs of Custom = 164.44% * $120,000 = $197,336 (adjusted so that total overhead costs equals $296,000)

Activity based costing

Standard = ( Overhead rate for machining * Number of Machine hours for standard ) + ( Overhead rate for machine setup * Number of machine setup hours for standard ) = ( $81.15 * 1,300 ) + ( $185.96 * 107 ) = $125,393.

Custom = ( Overhead rate for machining * Number of Machine hours for custom ) + ( Overhead rate for machine setup * Number of machine setup hours for custom ) = ( $81.15 * 1,140 ) + ( $185.96 * 420 ) = $170,607 (adjusted so that total overhead costs equals $296,000).