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. Standard Custom Direct labor costs $50,000 $100,000 Machine hours 1,500 1,200 Setup hours 90 360 Total estimated overhead costs are $297,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $108,000 is allocated to the machine setup activity cost pool. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) % of direct labor cost Predetermined overhead rate LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Compute the overhead rates using the activity-based costing approach. Machining per machine hour 2$ Machine setup per setup hour

Answer 1

Predetermined overhead rate Total Overhead cost Total Direct Labor cost Predetermined overhead rate $2,97,000 $1,50,000 $50000+$100000] 198.00% of direct labor cost Activity Cost Pools Expected Use of Cost Drivers per Activity Activity-Based Overhead Rates Estimated Overhead Cost $1,89,000 $1,08,000 Machining Mechine Setups 27001 machine 2700 machine hours 450 set up hour $70 per machine hour $240 per setup hour Traditional Costing Direct Labor co Rate $50,000 $1,00,000 10 Standard Custom saa 198.00% 198.00% $99,000 $1,98,000 Activity Based Costing Rate Machining Mechine Setups Total $70 $240 Standard Activity Amount 1500 $1,05,000 $21,600 $1,26,600 Custom Activity Amount 1200 $84,000 $86,400 $1,70,400 90 360