Question

Exercise 18-1 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. Direct labor costs Machine hours Setup hours Standard $41,000 1,430 110 Custom $99,000 1,330 420 Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $107,000 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.) Predetermined overhead rate % of direct labor cost LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining per machine hour Machine setups per setup hour LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.) Traditional costing Standard पी Custom पी Activity-based costing Standard पी Custom पी LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE

Answer 1

Traditional overhead rate = Estimated overhead / direct labor costs

= $304,000 / (41000+99000) = 202. 67%

202.67% of the direct labor cost

overhead rates under the activity-based costing (ABC):

Activity cost pools	Cost drivers	Estimated overhead
Machining	Machine hours	197,000
Machine setup	Setup hours	107,000

Calculate the machine hour and setup under Activity based overhead rates:

Per Machine hour = Cost of machining / Number of machine hours

= $197,000 / (1430+1330)=71.38

Per machine setup = Cost of machine setup / Number of machine setup hours

= $107,000 / (110+420)= 201.89

Determine the difference in allocation

traditional costing systems:

Details	Standard	Custom
$41,000 * 202.67%	$              83095
$99,000 * 202.67 %		$ 200643
Total	$ 83095	$ 200643

Activity based costing system:

Details	Standard	Custom
Machining:
1430 * $71.38	$ 102373
1330 * $71.38		$ 94935
Machine setup:
110 * $201.89	$              22208
420* $201.89		$                        84794
Total	$ 124581	$                       179729