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		$ 41,000		$ 119,000
Machine hours		1,190		1,390
Setup hours		99		380

Total estimated overhead costs are $ 296,000. Overhead cost allocated to the machining activity cost pool is $ 199,000, and $ 97,000 is allocated to the machine setup activity cost pool.

Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)

Traditional costing
Standard		$ enter a dollar amount rounded to 0 decimal places
Custom		$ enter a dollar amount rounded to 0 decimal places
Activity-based costing
Standard		$ enter a dollar amount rounded to 0 decimal places
Custom

Answer 1

• All working forms part of the answer
• Working 1: traditional method

A	Total Estimated Overheads	$          296,000.00
	Direct Labor Cost:
	Standard	$            41,000.00
	Custom	$          119,000.00
B	Total Direct Labor Cost	$          160,000.00
C = (A/B) x 100	Plantwide Overhead rate	185%

Working		Standard	Custom
A	Direct Labor Cost	$            41,000.00	$        119,000.00
B	Plantwide Overhead rate	185%	185%
C = A x B	Overhead cost allocated	$            75,850.00	$        220,150.00

• Working 2: Activity Based Method

Activity Cost Pool	Overhead cost	Total Activity driver		Overhead Rate
	[A]	[B]		[C = A /B]
Machining Activity	$          199,000.00	2580	machine hours	$            77.13178
Machine Setup Activity	$            97,000.00	479	setup hours	$         202.50522
	$          296,000.00

		STANDARD		CUSTOM
	Overhead Rate	No. of activity for Standard	Cost Allocated	No. of activity for Custom	Cost Allocated
	[A]	[B]	[C = A x B]	[D]	[E = A x D]
Machining Activity	$             77.13178	1190	$                 91,787	1390	$                107,213
Machine Setup Activity	$           202.50522	99	$                 20,048	380	$                  76,952
		Total Overhead allocated	$              111,835	Total Overhead allocated	$                184,165

• ANSWERS

Traditional costing
Standard	$                  75,850
Custom	$                220,150
TOTAL	$                296,000
Activity-based costing
Standard	$                111,835
Custom	$                184,165
TOTAL	$                296,000