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 1,500 1,200 Setup hours 90 420 Total estimated overhead costs are $291,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $102,000 is allocated to the machine setup activity cost pool. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, eg 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

Predetermined OH Rate using Plantwide traditional approach	194.00%
(OH / Direct labor costs)
(291000/150000)

Predetermined OH Rate using activity based costing approach
For Machine Hours:	70
(OH allocated to machining activity / Machine hours)	(189000/2700)
For Setup Hours:	200
(OH allocated to setup activity / Setup hours)	(102000/510)

Difference in allocation in above two approaches
Allocation Using Traditional Approach
Standard	97000
Custom	194000
Allocation Using Activity based costing Approach
Standard	123000
Custom	168000

Working Note:

Difference in allocation in above two approaches
	Standard	Custom
Allocation Using Traditional Approach	97000	194000
Allocation Using Activity based costing Approach
On basis of machine hours	105000	84000
On basis of setup hours	18000	84000
Total	123000	168000