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 Machine hours Setup hours $50,000 $100,000 1,200 1,500 120 360 Total estimated overhead costs are $294,600. Overhead cost allocated to the machining activity cost pool is $189,000, and $105,600 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 Question Attempts: Un

Answer 1

Please find attached table showing computation of overhead rate under Traditional costing and Activity based costing: Answers are highlighted and references are provided beside each column to understand the computation:

Standard Total Custom B 100000 C=A+B_150000 A 50000 Direct Labor cost Machine Hrs 2700 1200 1500 F=D+E 120 Set up hrs H. 360 I=G+H 480 % / $ per unit J 294000 (J/C) *100 196% Standard Total Custom J/C*A 98000 J/C*B 196000 Direct Labor cost Traditional costing 98000 196000 M=K/F K 189000 Machine Hrs D*M 84000 E*M 105000 70 N=L/I Set up hrs G*N 26400 H*N 79200 L 105600 220 Activity Based 110400 184200

1) Predetermined over head rate = 196% of direct labor cost

2) Overhead rate - Activity based costing:

Machining - $ 70 per machine hr

Machine set up - $ 220 per setup hr

3) Traditional costing:

Standard - $ 98,000

Custom - $ 196,000

4) Activity Based costing:

Standard - $ 110,400

Custom - $ 184,200