Issign overhead using E5.17 LO1.2)Elle Inc. makes two types of handbags: standar
ID: 2396750 • Letter: I
Question
Issign overhead using E5.17 LO1.2)Elle Inc. makes two types of handbags: standard and custom. The controller has decided to use a raditional costing and plant-wide overhead rate based on direct labour costs. The president has heard of activity-based costing and wants to see ABC how the results would differ if this system were used. Two activity cost pools were developed: machining and machine set-up. Presented below is information related to the company's operations. Direct labour costs Machine hours Set-up hours Custom $100,000 1,000 400 500 100 Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to the machine set-up activity cost pool. Instructions a. Calculate the overhead rate using the traditional (plant-wide) approach. b. Calculate the overhead rate using the activity-based costing approach. e. Writing Explain the difference in allocation between the two approaches.Explanation / Answer
(a) Overhead rate using the traditional (plant wide) approach
Overhead rate = Total estimated overhead costs / Direct labor costs
= $277,500 / [ $50,000 + 100,000 ]
= $277,500 / 150,000
= 185% of direct labor cost
(b)Overhead rates using the activity-based costing approach
Activity-based overhead rates
Machining Activity
= Overhead cost allocated to the machining activity cost pool / Total Machine Hours
= $177,000 / [ 500 Machine hours + 1000 Machine Hours ]
= $177,000 / 1,500 Machine Hours
= $118 per machine hours
Machine setup
= Overhead cost allocated to the machining activity cost pool / Total Set up hours
= $100,500 / [ 100 set up hours + 400 set up hours ]
= $100,500 / 500 Set up hours
= $201 per set up hours
(c) Difference in allocation between the two approaches
Traditional costing
Standard
Custom
$50,000 x 185%
$92,500
-
$100,000 x 185%
-
$92,500
TOTAL
$92,500
$92,500
Activity-based costing
Standard
Custom
Machining:
500 Machine hours x $118
59,000
1000 Machine hours x $118
118,000
Machine setup:
100 Set up hours x $201
20,100
100 Set up hours x $201
8,400
TOTAL
79,100
198,400
Traditional costing
Standard
Custom
$50,000 x 185%
$92,500
-
$100,000 x 185%
-
$92,500
TOTAL
$92,500
$92,500
Activity-based costing
Standard
Custom
Machining:
500 Machine hours x $118
59,000
1000 Machine hours x $118
118,000
Machine setup:
100 Set up hours x $201
20,100
100 Set up hours x $201
8,400
TOTAL
79,100
198,400
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