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CALCULATOR PRINTER VERSION 4 « BACK NEX RCES 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. 2.b Standard $50,000 Custom $100,000 1,500 Study Direct labor costs Machine hours Setup hours 1,200 90 390 Total estimated overhead costs are $285,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $96,000 is allocated to the machine setup activity cost pool. Your answer is correct. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate 190.00 % of direct labor cost SHOW SOLUTION VIDEO: SIMILAR EXERCISE LINK TO TEXT LINK TO TEXT Your answer is correct. 1 be here to search Then

Answer 1

1) 190%

predetermined overhead rate using traditioanal method=(budgeted overhead/budgeted cost of activity)*100

budgeted overhead= $285000

budgeted cost of activity (direct labour)=$150000

predetermined overhead rate using traditioanal method=(285000/150000)*100=190%

2) the difference in allocation between two approaches

traditional costing

standard	$95000
custom	$190000

under traditional costing method overhead allocation is based on predetermined overhead rate.it is calculated as multiplying the predetermined overhead rate (%) with the direct labour cost.therefore the budgeted overhead will split into standard and custom.

standard=$50000*190%=$95000

custom=$100000*190%=$190000

$190000+$95000=$285000 which is the total budgeted overhead

activity based costing

standard	$102000
custom	$183000

under activity based costing the budgeted overheads are seperated to cost pools and cost drivers,the overheads are allocated on how much the cost driver consumed for a product or service.overhead cost allocated to machining activity pool is $189000 and , $96000 is allocated to the machine setup activity pool.these cost pools are allocated on the the basis of machining hours and setup hours respectively.

cost drivers

	standard	custom
machine hours	1200	1500
setup hours	90	390

budgeted overhead for machining activity is $189000 and $96000 for setup activity

machining activity budgeted overhead allocation

for

standard =(1200/(1200+1500))*189000=84000

custom=(1500/(1200+1500))*189000=105000

setup activity budget overhead allocation

for

standard=(90/(90+390))*96000=18000

custom=(390/(90+390))*96000=78000

total budgeted overhead under activit based costing

for

standard=84000+18000=102000

custom=105000+78000=183000

$102000+$183000=$285000 which is the total budgeted overhead