Question

Exercise 4-1 (Video) Saddle Inc. has two types of handbags: standard and custom. The costing and wants to see how the results would differ if this company's operations controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the Standard Custom Direct labor costs Machine hours Setup hours $50,000 100,000 1,200 420 1,200 90 Total estimated overhead costs are $299,100. Overhead cost allocated to the machining activity cost pool is $192,000, and $107,100 is allocated to the machine setup activity cost pool Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e9. 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 per setup hour

Answer 1

1. Computation of the overhead rate using the traditional ( plantwide ) approach.

Direct labour cost = ($ 100000 + $ 50000) = $150000

Estimated overhead costs = $ 299100

Predetermined Overhead Rate = ( Estimated overhead costs / Direct labour cost )

= ( $ 299100 / $ 150000 ) = 199.40% ( Answer)

Predetermined Overhead Rate 199.40%  of direct labour cost.

2. Computation of the overhead rate using the activity based costing approach.

Machining = [ Machining cost pool / ( standard machine hours + custom machine hours ) ]

= [ $ 192000 / ( 1200 + 1200 ) ]

= ( $ 192000 / 2400 ) = $ 80 per machine hour

Machine set up= [ machine set up cost pool / ( standard set up hours + custom set up hours) ]

= [ $ 107100 / ( 90 + 420 )] = ( $ 107100 / 510 ) = $ 210 per set up hour

Answer:

Machining $​​​​​​80 per machine hour.

Machine set up $ 210 per set up hour.

3. Computation of the difference in allocation of the two approaches.

Traditional costing

Standard = ( $50000 * 199.40% ) = $ 99700

Custom = ( $100000* 199.40% ) = $ 199400

Activity based costing

Standard = ( 1200 *$ 80 ) + ( 90 * $210 )

= $ 96000 + $ 18900 = $ 114900

Custom = ( 1200 * $ 80 ) + ( 420 * 210 )

= $ 96000 + $ 88200 = $ 184200