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. Direct labor costs Machine hours Setup hours Standard $50,000 1.200 90 Custom $100,000 1.200 390 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. (a) 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

Answer 1

a) Predetermine overhead rate = 292800/150000 = 195.20% of labor cost

Machining = 192000/2400 = 80 per MH

Machine setup = 100800/480 = 210 per setup

Calculate following

Traditional costing
Standard (50000*1.952)	97600
Custom	195200
Activity based costing
Standard (1200*80+90*210)	114900
Custom	177900