Saddle Inc. has two types of handbags: standard and custom. The controller has d
ID: 2483044 • 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
Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $103,000 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.)
% of direct labor cost
Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.)
Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)
$
Standard
Custom
Direct labor costs $51,000 $112,000 Machine hours 1,420 1,470 Setup hours 103 370Explanation / Answer
a predetermined rate as per traditional costing (300000/(51000+112000)) 184.05% b overhead rates as per ABC machining (197000/(1420+1470)) 68.17 machine set up (103000/(103+370)) 217.76 c difference in allocation standard custom traditional (51000*184.05%) 93865.03067 206134.9693 (112000*184.05%) total 93865.03067 206134.9693 ABC machining (68.17*1420), (68.17*1470) 96795.84775 100204.1522 machine set up (217.76*103),(217.76*370) 22429.17548 80570.82452 total 119225.0232 180774.9768 difference -25359.99255 25359.99255
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