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 1.200 420 Total estimated overhead costs are $299,100. Overhead cost allocated to the machining activity cost pool is $192,000, and $107,100 is allocated to the machine setup activity cost pool.

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Answer 1

Calculations of overhead rate under traditional method. $ 299,100 150,000 (50000 + 100000) Divide Estimated Overhead Estimated direct labor hours Predetermined Overhead rate Predetermined Overhead rate % $ 1.9940 199.40% Multiply by 100 Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver (A) Estimated Overhead (B) Expected use of cost driver (A)/(B) Activity based overhead rate Activity cost pool $ Machining Machine Setup $ $ 192,000 107,100 299, 100 2400 products 510 MH 80.00 Per product 210.00 Per MH $ $ Expected use of cost driver Machining = 1200 + 1200 = 2400 Machine Setup = 90 +420 = 510 Calculations of overhead under traditional method. Overhead cost assigned = Direct Labor cost x Predetermined rate under traditional method Standard = 50000 x 199.40% = 99700 Custom = 100000 x 199.40% = 1994001 Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver x Activity based overhead rate Activity cost pool Standard (A) (B) (A x B) Expected Cost Activity based driver overhead rate Cost Assigned 1200 $ 80.00 $ 96,000 90 $ 210.00 $ 18,900 $ 114,900 Custom (A) (B) (AXB) Expected Cost Activity based driver overhead rate Cost Assigned 1200 $ 80.00 $ 96,000 420 $ 210.00 $ 88,200 $ 184,200 Machining Machine Setup Total Cost Assigned Standard Custom $ $ 114,900 184,200