Question

A B C D E F G H 1 E4-1 Assign overhead using traditional costing and ABC | 2 Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide 3 overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how 4 the results would differ If this system was used. Two activity cost pools were developed: machining and machine 5 setup. Presented below is Information related to the company's operations Direct labor costs Machine hours Setup hours Standard Custom $50,000 $100,000 1,000 1,000 100 400 10 12 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is 13 $140,000 and $100,000 is allocated to the machine setup activity cost pool. 15 Instructions 16 (6) Compute the overhead rate using the traditional (plontwido) approach 17 (0) Compute the overhead rates using the activity based costing approach 18 (6) Determine the difference in allocation between the two approaches, 19 20 NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". Predetermined overhead rato 23 (a) Estimated overhead Direct labor costs Value - Value of direct labor cost Value 30 (b) Activity cost pools Machining Machine setup Cost drivers Machino hours Setup hours Estimated overhead $140,000 100,000 14. 1 Activity based overhead ratos 9 PAPARACOW

Answer 1

a)
Estimated Overhead		=	Predetermined overhead rate
Direct labor costs
$                                            240,000		=	1.60	of direct labor cost
$                                            150,000
b)
Activity Cost pool			Cost driver			Estimated Overhead
Machining			Machine hours			$                                140,000
Machine setup			Setup hours			$                                100,000
Activity-based overhead rates
Maching:
$                                            140,000		=	70.00	per machine hour
2,000
Machine setup
$                                            100,000		=	200.00	per setup hour
500
c)
Traditional costing
			Standard	Custom
$50,000 × POH (i.e. $1.60)			$                 80,000
$100,000 × POH (i.e. $1.60)				$                          160,000
Total OH allocation			$                 80,000	$                         160,000
Activity based costing
			Standard	Custom
Machining:
1,000 MH × OH rate (i.e.70)			$                 70,000
1,000 MH × OH rate (i.e.70)				$                            70,000
Machine setup:
100 setup hr × OH rate (i.e. 200)			$                 20,000
400 setup hr × OH rate (i.e. 200)				$                            80,000
Total OH allocation			$                 90,000	$                          150,000
Working Notes:
Total Direct labor cost		=	(100,000 + 50,000)	=	$      150,000
Total Machine hours		=	(1,000 + 1,000)	=	2,000
Total Machine setup hours		=	(100 + 400)	=	500