E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller

Question

E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller has deeided 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. Pre- sented below is information related to the companys operations. C. Standard Custom Direct labor costs $50,000 $100,000 1,000 400 Machine hours Setup hours 1,000 100 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost 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.

Explanation / Answer

a) Overhead rate under traditional approach = 240000*100/150000 = 160% of direct labour cost

b) Overhead rate using activity based :

c) Under traditional costing overhead is allocated under single plantwide rate but in activity based costing overhead is allocated under activities which is known as cost pool.

Under Activity based costing overhead allocation is more reliable than traditional costing

Activity rate Machining (140000/2000) 70 per machine hour Machine setup (100000/500) 200 per setup

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.