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 $50,000 1,200 90 $100,000 1,200 390 Setup hours Total estimated overhead costs are $292,800. Overhead cost allocated to the machining activity cost pool is $192,000, and $100,800 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 LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE

Answer 1

Solution a:

Predetermined overhead rate = Estimated Overhead / Total direct labor costs

= $292800 / $150000 = 195.20%

Solution b:

Overhead rate:

Machining = $192000/ 2400 hours = $80 per machine hour

Machine setup = $100800 / (90+390) = $210 per setup hour

Solution c:

Traditional costing:

Standard = $50000*195.20% = $97,600

Custom = $100000*195.20% = $195,200

Activity based costing:

Standard = $80*1200 + $210*90 = $114,900

Custom = $80*1200 + $210*390 = $$177,900