Question

Exercise 17-01 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 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 $50,000 Direct labor costs Machine hours Setup hours Custom $100,000 1,200 390 1,200 Total estimated overhead costs are $297,600. Overhead cost allocated to the machining activity cost pool is 5192,000, and $105,600 is allocated to the machine setup activity cost pool. Compute the overhead rate using the tradicional (plantwide) approach (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate % of direct labor cost Compute the overhead rates using the activity-based costing approach Machining per machine hour Machine setup a per setup hour

Answer 1

a)Total direct labor cost :50000 +100000 = 150000

Predetermined overhead rate =Estimated overhead /estimated direct labor cost

                        = 297600 /150000

                        = 1.984 or 198.4% of direct labor cost

b)

Activity	overhead cost	Total activity	overhead rate
Machining	192000	1200+1200 = 2400 machine hours	192000/2400 =$ 80 per MH
Machine set up	105600	90+390=480 Setup hours	105600/480 =$ 220 per setup hours

c)Traditional approach :

	overhead allocation (Direct labor cost *overhead rate)
Standard	50000*198.4%=99200
Custom	100000*198.4%= 198400

Activity based :

	Standard	custom
Machining (Machine hours*activity rate)	1200*80= 96000	96000
Machine set up (set up hours *activity rate)	90*220=19800	390*220= 85800
Total allocation	115800	181800