Saddle Inc. has two types of handbags: standard and custom. The controller has d
ID: 2426543 • 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 Custom Direct labor costs $ 41,000 $ 99,000 Machine hours 1,430 1,330 Setup hours 110 420 Total estimated overhead costs are $ 304,000 . Overhead cost allocated to the machining activity cost pool is $ 197,000 , and $ 107,000 is allocated to the machine setup activity cost pool.
Compute the overhead rate using the traditional (plantwide) approach
Explanation / Answer
Total direct labour costs = $41,000 + $99,000 = $140,000
Total overhead costs = $304,000
Overhead rate as per traditional approach = Total overhead costs/Total direct labour costs = $304,000/140,000 = 217.14% of direct labor costs
Overhead allocated to Standard handbags = $41,000 * 217.14% = $89,030
Overhead allocated to Custom handbags = $99,000 * 217.14% = $214,970
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