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E17-1 Wilkins 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 companys operations Direct labor costs Machine hours Setup hours Standard Custom $50,000 1,000 100 $100,000 1,000 400 Total estimated overhead costs are $270,000. Overhead cost allocated to the machining activity cost pool is $170,000, and $100,000 is allocated to the machine setup activity cost pool Instructions (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach (c) Determine the difference in allocation between the two approaches.

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Estimated overhead cost Estimated direct labor cost Traditional overhead rate per DL cost $270,000 $150,000 [$50,000 $100,000] $1.80[$270,000/$150,000] Requirement-(b): Machine Machining Setup 170,000 名(XX) $100,000 Allocated overhead cost Estimated machine hours Estimated setup hours Activity based overhead rate [Machining = $170,000 / 2,000 MHS-$85 per MH; Machine setup = $100,000/500 SHs-$200 per SH] [1,000+1,000] 500 [100+400] $200 $85Requirement-(c Standard Custom Direct labor cost Traditional overhead rate per DL cost $1.80 Overhead allocated - Traditional Standard = $50,000 x $1.80 = $90,000; Custom = $100,000 x $1.80 = $180,000] $50,000 $100,000 S1.80 [Ref: Requirement-(a)l $90,000 $180,000 Standard Custom Machine hours Overhead rate per MH Machining cost allocated 1,000 $85 $85,000$85,000 1,000 $85 [Ref: Requirement-(b)l [1,000 x $85 for both] Machine Setup hours Overhead rate per SH Machine setup cost allocated 100 $200 400 $200 [Ref: Requirement-(b)l $20,000$80,000 [100 x $200 $20,000; 400 x $200 $80,000] Overhead allocated - Activity based $105,000 $165,000 [Standard $85,000 $20,000 $105,000; Custom $85,000 $80,000 $165,000] Difference in overhead allocated $15,000$15,000 Standard = $90,000-$105,000--$15,000, custom-$180,000-$165,000-$15,000]

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