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		$ 50,000		$ 100,000
Machine hours		1,500		1,200
Setup hours		120		420

Total estimated overhead costs are $ 297,000. Overhead cost allocated to the machining activity cost pool is $ 189,000, and $ 108,000 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

enter the overhead rate as percentage of direct labor cost rounded to 2 decimal places

% of direct labor cost

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Compute the overhead rates using the activity-based costing approach.

Machining		$ enter a dollar amount per machine hour	per machine hour
Machine setup		$ enter a dollar amount per setup hour	per setup hour

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Determine the difference in allocation between the two approaches.

Traditional costing
Standard		$ enter a dollar amount
Custom		$ enter a dollar amount
Activity-based costing
Standard		$ enter a dollar amount
Custom		$ enter a dollar amount

Answer 1