Question

Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour hours. 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 set-up. Presented below is information related to the company's operations.

	Standard	Custom
Direct labour costs	$50,000	$100,000
Machine hours	500	1,000
Set-up hours	100	400

Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to machine set-up activity cost pool.

Please answering the following questions:

(a) Calculate the overhead rate using the traditional approach.

Answer% of direct labour cost.

(b) Calculate the overhead rates using the activity-based costing approach.

Machining: $________ per machine hour
Machine setup: $________per setup hour.

(c) Calculate the allocation of overhead to the standard handbag under both approaches:

Traditional: $_________
Activity-Based: $________

(d) Calculate the allocation of overhead to the custom handbag under both approaches:

Traditional: $________
Activity-Based: $________

Answer 1

Estimated overhead			= Predetermined overhead rate
Direct labor costs
277500/($50,000 + $100,500)			= 200% of direct labor cost
Activity cost pools	Cost drivers		Estimated overhead
Machining	Machine hours		177000
Machine setup	Set up hours		100500
Activity-based overhead rates
Machining:					Machine setup:
177000/(500+1000)	= $118 per machine hour				100500/500		= $201 per setup hour
Traditional costing			Standard		Custom
$50,000 X 200%			92193
$100,000 X 200%					184385
			92193		184385
Activity-based costing			Standard		Custom
Machining:
500 X $118			59000
1,000 X $118					118000
Machine setup:
100 X $201			20100
400 X $201					80400
Total			79100		198400