Question

Assign overhead using traditional costing and ABC Saddle Inc. has two types of handbags: standard and custom. The controller has overhead rate based on direct labor costs. The president has heard of activity-based o machining the results would differ if this system was used. Two activity cost pools were developed setup. Presented below is information related to the company's operations. decided to use a plantwide s to see how Direct labor costs Machine hours Setup hours Standard Custom $50,000 $100,000 1,000 1,000 100 400 Total estimated overhead costs are $240,000. overhead cost allocated to the machining $140,000 and $100,000 is allocated to the machine setup activity cost activity cost pool is pool. Instructions (a) Compute the overhead rate using the traditional (plantwide) approach (b) Compute the overhead rates using the activity-based costing approach (c) Determine the difference in allocation between the two approaches. th a "? NOTE Enter a number in cells requesting a value; enter either a number or a formula in cells wi : Estimated overheadPredetermined overhead rate Direct labor costs (a) Value of direct labor cost Value Value Activity cost pools Machining Cost drivers Machine hours Setup hours Estimated overhead $140,000 100,000 (b) Machine setup Activity-based overhead rates Machining:

Answer 1

Answer

• Exercise E4-1
• Requirement ‘a’

$240,000	160%	of direct labor cost
$150,000

• Requirement ‘b’

Machining:
$140,000	$                 70.00	per machine hours
2000
Machine Setup:
$100,000	$                200.00	per setup hours
500

• Requirement ‘c’

Traditional Costing:
	Standard	Custom
$ 50000 x 160%	$80,000
$ 100000 x 160%		$160,000
Total OH allocation	$80,000	$160,000
Activity based Costing:
	Standard	Custom
Machining:
1000 MH x $ 70	$70,000
1000 MH x $ 70		$70,000
Machine Setup:
100 Setup hr x $ 200	$20,000
400 Setup hr x $ 200		$80,000
Total OH allocation	$90,000	$150,000

• Exercise with revised data:

$285,000	190%	of direct labor cost
$150,000

Machining:
$150,000	$                  75.00	per machine hours
2000
Machine Setup:
$135,000	$                270.00	per setup hours
500

Traditional Costing:
	Standard	Custom
$ 50000 x 190%	$95,000
$ 100000 x 190%		$190,000
Total OH allocation	$95,000	$190,000
Activity based Costing:
	Standard	Custom
Machining:
1000 MH x $ 75	$75,000
1000 MH x $ 75		$75,000
Machine Setup:
100 Setup hr x $ 270	$27,000
400 Setup hr x $ 270		$108,000
Total OH allocation	$102,000	$183,000