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 Machine hours $50,000 $100,000 1,200 1,200 90 390 Setup hours Total estimated overhead costs are $292,800. Overhead cost allocated to the machining activity cost pool is $192,000, and $100,800 is allocated to the machine setup activity cost pool. X Your answer is incorrect. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate 196 % of direct labor cost

Answer 1

Estimated overhead cost = $292,800

Direct labor cost of Standard = $50,000

Direct labor cost of Custom = $100,000

Total direct labor cost = Direct labor cost of Standard + Direct labor cost of Custom

= 50,000+100,000

= $150,000

Predetermined overhead rate = Estimated overhead cost/Total direct labor cost

= 292,800/150,000

= $1.96

Predetermined overhead rate = 195.2% of direct labor cost

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