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 Custom $100,000 1,200 90 420 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.

please help and show work

Answer 1

1. Predetermined Overhead Rate = Total Overheads / Direct Labor Cost

Hence, Predetermined Overhead Rate = $299,100 / ($50,000 + $100,000) = 199.40%

2. Overhead Rates using ABC Approach:

Machining Activity Overhead rate = Machining Activity Costs / Total Machine Hours

Hence, Machining Activity Overhead rate = $192,000 / (1,200 + 1,200) = $80 per Machine Hour

Machining Set up Overhead rate = Machining Set up Overhead Cost / Total Machine Set ups

Hence, Machining Set up Overhead rate = $107,100 / (90 + 420) = $210 per Machine Set ups

3. Computation of allocation of costs:

Traditional costing:

$99,700 Standard ($50,000*199.40%) Custom ($100,000*199.40%) $199,400

Activity Based Costing:

Standard Machining Activity Cost A = $80*1,200 Hours Machining Setup Cost B = $210*90 Set Ups Total Costs Allocated to Standard Product C=A+B $96,000 $18,900 $114,900 Custom Machining Activity Cost Machining Setup Cost Total Costs Allocated to Custom Product A = $80*1,200 Hours B = $210*420 Set Ups C=A+B $96,000 $88,200 $184,200