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		$50,000		$100,000
Machine hours		1,200		1,500
Setup hours		90		390

Total estimated overhead costs are $285,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $96,000 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

Compute the overhead rates using the activity-based costing approach.

		enter a dollar amount per machine hour
		enter a dollar amount per setup hour

Answer 1

Solution:- 1. Computation of Predetermined overhead rate Predetermined overhead rate = Estimated overhead costs / *Total Direct labor cost = $285,000 / $150,000 = 190 % direct labor cost * Total Direct labor cost = Standard DL cost + Custom DL cost = $50,000 + $100,000 = $150,000 2.Computation of Overhead Rate using the Activity based Costing Machining = Cost allocated to Machining Activity / Total Machine hours[a] = $189,000 / 2,700 hrs = $70 per Machine hrs [a] Total Machine hours = Standard Machine hrs + Custom Machine hrs = 1,200 hrs + 1,500 hrs = 2,700 hrs Machine Setup = Cost allocated to the Machine setup Activity / Total Machine Setup hours[b] = $96,000 / 480Setup hrs = $200 pe Setup hrs [b] Total Machine Setup hours = Standard Machine setup hrs + Custom machine Setup hrs = 90 hrs +390 hrs = 480 hours