Wilkins Inc. has two types of handbags: standard and custom. The controller has

Question

Wilkins 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

Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. $1,225.)

Standard

Custom

Direct labor costs $55,200 $117,000 Machine hours 1,340 1,370 Setup hours 98 420

Explanation / Answer

Traditional costing Total Labor cost 55,200+117,000 $     172,200 Total overhead cost $     298,600 Standard costing (55,200 / 172,200) x 298,600 $       95,718 Custom Costing (117,000 / 172,200) x 298,600 $     202,882 Activity Based costing Total machine hours 1340 + 1370 $         2,710 Total Setup hours 98 + 420 $           518 Standard Allocated for machine hours (1340/ 2710) x 198,900 $       98,349 Allocated for setup (98 / 518 ) x 99700 $       18,862 Total Allocated Overhead $     117,211 Custom Allocated for machine hours (1370 / 2710 ) x 198900 $     100,551 Allocated for setup (420 / 518) x 99700 $       80,838 Total Allocated Overhead $     181,389

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