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. 

Total estimated overhead costs are $292,900. Overhead cost allocated to the machining activity cost pool is $192,000, and $100,000 is a located to the machine setup activity cost pool. 

a Compute the overhead rate using the traditional plantwide) approach. (Round answer to 2 decimal places, eg. 12.25.) 

b Compute the overhead rates using the activity-based costing approach

c Determine the difference in allocation between the two approaches.

Answer 1

Solution c:

Traditional costing:

Standard = $50000*195.20% = $97,600

Custom = $100000*195.20% = $195,200

Activity based costing:

Standard = $80*1200 + $210*90 = $114,900

Custom = $80*1200 + $210*390 = $177,900