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		$60,000		$120,000
Machine hours		1,300		1,140
Setup hours		107		420

Total estimated overhead costs are $296,000. Overhead cost allocated to the machining activity cost pool is $198,000, and $98,000 is allocated to the machine setup activity cost pool.

Compute the overhead rate using the traditional (plantwide) approach

AND

Compute the overhead rates for maching per machine hour and machine setup per setup hour using the activity-based costing approach

AND

Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)

Traditional costing
Standard		$enter a dollar amount rounded to 0 decimal places
Custom		$enter a dollar amount rounded to 0 decimal places
Activity-based costing
Standard		$enter a dollar amount rounded to 0 decimal places
Custom		$enter a dollar amount rounded to 0 decimal places

Answer 1

Answers

• Working calculations and answers

Total Overhead	$296,000	164.44%	of direct labor cost
Total Direct Labor Cost	$180,000

	Machining:
Overhead	$198,000	$                      81.15	per machine hours
Machine Hours	2440
	Machine Setup:
Overhead	$98,000	$                    185.96	per setup hours
Setup Hours	527

Traditional Costing:
	Standard	Custom
$ 60000 x 164.44%	$98,664
$ 120000 x 164.44%		$197,328
Total OH allocation	$98,664	$197,328
Activity based Costing:
	Standard	Custom
Machining:
1300 MH x $ 81.15	$105,495
1140 MH x $ 81.15		$92,511
Machine Setup:
107 Setup hr x $ 185.96	$19,898
420 Setup hr x $ 185.96		$78,103
Total OH allocation	$125,393	$170,614

Traditional Costing:
Standard	$98,664
Custom	$197,328
Activity based Costing:
Standard	$125,393
Custom	$170,614