Saddle Inc, has two types of handbags: standard and custom. The controller has d
ID: 2414154 • Letter: S
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 Custonm Direct labor costs Machine hours Setup hours $59,000 1,350 98 $119,000 1,180 410 Total estimated overhead costs are?297,000. overhead cost allocated to the machining activity cost pool is $200,000, and $97,000 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 Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining per machine hour Machine setup per setup hour Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.) stin Standard Custom Standard CustomExplanation / Answer
(a) Overhead rate using the traditional (plant wide) approach
Overhead rate = Total estimated overhead costs / Direct labor costs
= $297,000 / [ $59,000 + 119,000 ]
= $297,000 / 178,000
= 166.85% of Direct Labor Cost
Predetermined Overhead Rate = 166.85% of Direct Labor Cost
(b) Overhead rates using the activity-based costing approach
Machining Activity = $79.05 per machine hours
Machine setup = $190.94 per set up hours
Machining Activity
= Overhead cost allocated to the machining activity cost pool / Total Machine Hours
= $200,000 / [ 1350 Machine hours + 1180 Machine Hours ]
= $200,000 / 2530 Machine Hours
= $79.05 per machine hours
Machine setup
= Overhead cost allocated to the machining activity cost pool / Total Set up hours
= $97,000 / [ 98 set up hours + 410 set up hours ]
= $97,000 / 508 Set up hours
= $190.94 per set up hours
(c) Difference in allocation between the two approaches
Traditional costing
Standard
$98,442
Custom
$198,552
Activity-based costing
Standard
$125,430
Custom
$171,564
Traditional costing
Standard
Custom
$59,000 x 166.85%
$98,442
-
$119,000 x 166.85%
-
$198,552
TOTAL
$98,442
$198,552
Activity-based costing
Standard
Custom
Machining:
1350 Machine hours x $79.05
$106,718
1180 Machine hours x $79.05
$93,279
Machine setup:
98 Set up hours x $190.94
$18,712
410 Set up hours x $190.94
$78,285
TOTAL
$125,430
$171,564
Traditional costing
Standard
$98,442
Custom
$198,552
Activity-based costing
Standard
$125,430
Custom
$171,564
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.