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 $40,000 1,450 103 Custom $110,000 1,460 370 Total estimated overhead costs are $295,000. Overhead cost allocated to the machining activity cost pool is $196,000, and $99,000 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.) per machine hour Machining 5 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 o decimal places, e.g. 1,225.) Traditional costing Standard Custom Activity-based costing Standard + Custom

Answer 1

1 Over head rate using traditional approach = - Estimated Direct overhead labour. $295000 x lao $ 9oooo + $110000 29500D x loo 15oooo - 196.67% Querhead rate using activity based casting approach Machining = $19 900 (etch $450 lotal Machine hours - Std. hours + Custom hous - 1450+ 1460 2910 hours thus, Machining = $ 196000 = $67.35 per machine 2910 S hows- Now, Total set up hours. 103 C Std.) + 370 (Custom) - 473 hours set up = set up = $ $.99000 a $209.30 per 473 I set up hour thus, Machine ine

Difference in allocation between two approaches, tradition costing Standard = $40000 x 1966674 $ 78668 Custom Sl llocs x 196'674 = $ 216337. Activity based costing Standard 2910x 67.35 - $ 19598815 Custom 473 x 209.30 = 98 998.9