Exercise 17-1 Saddle Inc. has two types of handbags: standard and custom. The co

Question

Exercise 17-1 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 Customm Direct labor costs Machine hours Setup hours $50,000 1,000 100 $100,000 1,000 400 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 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 Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining Machine setup per machine hour per setup hour Determine the difference in allocation hetween the two anproaches, (Round answers to 0 deçimal places, e.a. 1.225.

Explanation / Answer

a.compute overhead rate using the traditional approach.

predetermined overhead rate = 160% of direct labour cost.

working :

pre determined overhead rate = total overhead costs / direct labour costs

=> $240,000 / $150,000

=>160%.

b.overhead rates using the activity based costing approach.

machining = $70 per machine hour.

machine setup = $200 per setup hour.

working note:

machining = cost allocated to machining activity / machine hours =>$140,000 / (1000+1000) hours

=>$140,000 / 2,000>$70 per machine hour.

machine setup = cost allocated to machine setup / setup hours

=>$100,000/ (100 +400) setup hours

=>$200 setup hour.

2nd part

Traditional costing:

activity based costing:

standard ($70*1,000) + ($200*100)

standard ($50,000*160%) $80,000 custom ($100,000*160%) $160,000

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