Question

Exercise 4-1 (Video) 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 Machine hours $50,000 $100,000 1,500 120 1,200 420 Setup hours Total estimated overhead costs are $297,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $108,000 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. Machining per machine hour $ Machine setup $ per setup hour Determine the difference in allocation between the two approaches. Traditional costing Standard $ Custom $ Activity-based costing Standard $ Custom $

Answer 1

Total Estimated Overhead Costs = $ 297000 Total Direct Labor Costs = $ 50000 + $ 100000 $ 150000 Predetermined Overhead Rate = Total Estimated Overhead Costs / Total Direct Labor Costs Predetermined Overhead Rate = 297000 / 150000 * 100 = 198 % Answer ----------> Predetermined Overhead Rate = 198 % of Direct Labor Costs Computation of Overhead Rates using activity based approach Overhead cost allocated to machining activity = $ 189000 Total Machine Hours = 1500 + 1200 = 2700 hours Machining = 189000 / 2700 = $ 70 per machine hour Overhead cost allocated to machining Setup activity = $ 108000 Total Setup Hours = 120 +420 = 540 hours Machine setup = $ 108000 / 540 = $ 200 per setup hour

Answer ----------> Machining = $ 70 per machine hour Machine Setup = $ 200 per setup hour Difference in allocation between two approaches Answer ----------> Traditional Costing Explanation Activity Based Costing Explanation Standard 99000 50000 *198 % 129000 1500 * 70 + 120 * 200 Custom 198000 100000 * 198% 168000 1200 * 70 + 420 * 200 Total 297000 297000

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