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

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 Machine hours Setup hours $43,000 $120,000 1,410 410 1,390 104 Total estimated overhead costs are $295,000. Overhead cost allocated to the machining activity cost pool is $199,000, and $96,000 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 LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining Machine setup s per machine hour per setup hour

Explanation / Answer

1) Predetermine overhead rate = 295000*100/163000 = 180.98% of labour cost

2) Calculate overhead rate :

Machining = 199000/2800 = 71.07 per machine hour

Machine setup = 96000/514 = 186.77 per setup hour

3) Traditional costing

Standard = 295000*43000/163000 = 77822

Custom = 295000*120000/163000 = 217178

Activity based costing :

Standard = (199000*1390/2800+96000*104/514) = 118213

Custom = (199000*1410/2800+96000*410/514) = 176787

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