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		1,500
Setup hours		90		420

Total estimated overhead costs are $306,900. Overhead cost allocated to the machining activity cost pool is $210,000, and $96,900 is allocated to the machine setup activity cost pool.

Answer 1

Plantwide overhead rate =	Overhead Cost/direct labor costs
	=306,900/(50,000+100,000)
	$               2.05

	Standard	Custom
Direct Labour Cost	$    50,000.00	$100,000
Overhead Cost allocated	$ 102,300.00	$ 204,600.00
Total Product Cost	$ 152,300.00	$ 304,600.00

ABC Costing -

	Total Cost	Driver	Total Of Driver	Overhead Rate
Machining activity	$        210,000	Machine hours	3000	$                      70
Machine setup	$          96,900	Setup hours	510	$                    190

	Standard	Custom
Direct Labour Cost	$    50,000.00	$100,000
Machine Cost	$ 105,000.00	$ 105,000.00
Setup Cost	$    17,100.00	$    79,800.00
Total Product Cost	$ 172,100.00	$ 284,800.00

Under Traditional costing, Standard product is underapplied and Custom is overapplied.