Exercise 4-1 Saddle Inc. has two types has heard of activity-based costing and w
ID: 2391314 • Letter: E
Question
Exercise 4-1 Saddle Inc. has two types has heard of activity-based costing and wants to see how the results would differ if this s machine setup. Presented below is information related to the company's operations. of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president ystem were used. Two activity cost pools were developed: machining and Standard Custom Direct labor costs Machine hours Setup hours 0,000 $119,000 1,280 380 1,390 105 Total estimated overhead costs are $306,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $109,000 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 VIDEO SIMILAR EXERCISE Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining Machine setup per machine hour per setup hourExplanation / Answer
Answer to Part 1)
Predetermined Overhead Rate = Estimated Overhead Cost / Direct Labor Cost
Estimated Overhead Cost = $306,000
Direct Labor Cost = $50,000 + $119,000
Direct Labor Cost = $169,000
Predetermined Overhead Rate = 306,000 / 169,000
Predetermined Overhead Rate = 181.07% of Direct Labor Cost
Answer to Part 2)
Activity Based Machining Overhead Rate = Estimated Machining Overhead / Machine Hours
Estimated Machining Overhead = $197,000
Machine Hours = 1,390 + 1,280 = 2,670 Machine Hours
Activity Based Machining Overhead Rate = 197,000 / 2,670
Activity Based Machining Overhead Rate = $73.78 per Machine Hour
Activity Based Machine Setup Overhead Rate = Estimated Machine Setup Overhead / Setup Hours
Estimated Machine Setup Overhead = $109,000
Setup Hours = 105 + 380 = 485 Setup Hours
Activity Based Machine Setup Overhead Rate = 109,000 / 485
Activity Based Mache Setup Overhead Rate = $224.74 per Setup Hour
Answer to Part 3)
Traditional Costing:
Standard:
Overhead allocated to Standard Handbags = $50,000 * 181.07%
Overhead allocated to Standard Handbags = $90,535
Custom:
Overhead allocated to Standard Handbags = $119,000 * 181.07%
Overhead allocated to Standard Handbags = $215,473
Activity Based Costing:
Standard:
Overhead allocated to Machining = 1,390 * $73.78
Overhead allocated to Machining = $102,554
Overhead allocated to Machine Setups = 105 * $224.74
Overhead allocated to Machining = $23,598
Total Cost allocated to Standard Handbags = $102,554 + $23,598
Total Cost allocated to Standard Handbags = $126,152
Custom:
Overhead allocated to Machining = 1,280 * $73.78
Overhead allocated to Machining = $94,438
Overhead allocated to Machine Setups = 380 * $224.74
Overhead allocated to Machining = $85,401
Total Cost allocated to Standard Handbags = $94,438 + $85,401
Total Cost allocated to Standard Handbags = $179,839
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