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 Setup hours 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 $50,000 1,200 90 $100,000 1,200 420 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 LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE

Answer 1

Answer

• All working forms part of the answer
• Requirement 1

Total estimated Overheads = $299,100	199.40%	of direct labor cost [299100 / 150000]
Total Direct Labor cost = $150,000

• Requirement 2

Machining:
$192,000	$                  80.00	per machine hours
2400
Machine Setup:
$107,100	$                210.00	per setup hours
510

• Requirement 3

Traditional Costing:
	Standard	Custom
$ 50000 x 199.40%	$99,700
$ 100000 x 199.40%		$199,400
Total OH allocation	$99,700 = Answer	$199,400 = Answer

Activity based Costing:
	Standard	Custom
Machining:
1200 MH x $ 80	$96,000
1200 MH x $ 80		$96,000
Machine Setup:
90 Setup hr x $ 210	$18,900
420 Setup hr x $ 210		$88,200
Total OH allocation	$114,900 = Answer	$184,200 = Answer