Question

Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant wide 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 $50,000 $100,000 Machine hours 500 1,000 Setup hours 100 400 Total estimated overhead costs are $247500. Overhead cost allocated to the machining activity cost pool is $200,000, and $100,000 is allocated to the machine setup activity cost pool. Compute the overhead rate using the traditional (plant wide) approach. % of direct labor cost Compute the overhead rates using the activity-based costing approach

Answer 1

a. Calculation of overhead rate based on direct labor cost under traditional approach Estimated direct labor cost - $50,000 + $100,000$150,000 Estimated manufacturing overhead cost $247,500 = Pre-determined overhead rate -(Estimated manufactured overhead cost Estimated direct labor cost)*100 -$247,500 + S150,000 165.00% (rounded to 2 decimal places) Overhead rate under traditional approach 165,00%

.

b. Calculation of overhead rate under activity-based costing approach

**Overhead rate (or) Activity rate = Activity cost ÷ Activity quantity

.

Activity	Activity cost = a	Activity quantity = b						Overhead rate = a ÷ b
Machining	$200,000	1,500 machine hours						$133.33	Per machine hour
		(500 + 1,000)
Machine Setups	$100,000	500 Setup hours						$200.00	Per setup hour
		(100 + 400)

.

Machining	$133.33	Per machine hour
Machine Setups	$200.00	Per setup hour

a. Calculation of overhead rate based on direct labor cost under traditional approach Estimated direct labor cost - $50,000 + $100,000$150,000 Estimated manufacturing overhead cost = $247,500 (Estimated direct labor cost ÷ Estimated manufactured overhead cost)* 100 = $150,000 ÷ $247,500 -60.61% (rounded to 2 decimal places) Pre-determined overhead rate Overhead rate under traditional approach 60.61%