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

Total estimated overhead costs are $304,800. Overhead cost allocated to the machining activity cost pool is $196,800, and $108,000 is allocated to the machine setup activity cost pool.

Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)

Standard

Custom

Direct labor costs $43,900 $104,000 Machine hours 1,270 1,410 Setup hours 98 400

Explanation / Answer

(a) Predetermined Overhead Rate=Estimated Overhead/Direct Labour cost $304800/($43900+$10400) $304800/$54300 561.33% (b) Compute the overhead rates using the activity based costing approach Total Machine Hour=1270+1410 2680 Total Machine Setup hour=98+400 498 Overhead rates using the activity based costing approach: Machine Overhead Rate=196800/2680 73.43 per hour Machine Setup Overhead Rate=108000/498 216.86 per setup hour © Determine the differnece in allocation between the two appraches. Traditional costing: 43900*561.33%=          246422.00 10400*561.33%= 58378.00 304800 Activity Based Costing: Machining Activity: 1270*73.43 93256 1410*73.43 103544 196800 Machine Setup Activity: 98*216.86 21254 400*216.86 86746 108000

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