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 $312,000. Overhead cost allocated to the machining activity cost pool is $210,000, and $102,000 is allocated to the machine setup activity cost pool.

Compute the overhead rate using the traditional (plantwide) approach

Machining = ___ $ per hour

Machine Setup = ___$ per hour

Determine the difference in allocation between the two approaches.

Traditional Costing:

Standard: $__________

Custom: $__________

Activity Based Costing:

Standard: $__________

Custom:$__________

Answer 1

Under traditional costing a single allocation base is used to allocate overhead costs while under activity based costing different allocation based is used based on activities undertaken.

Answer is calculated as shown below: