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 $60,000 $103,000 Machine hours 1,400 1,290 Setup hours 96 400 Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $195,000, and $105,000 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 $ per machine hour Machine setup $ per setup hour Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.) Traditional costing Standard $ Custom $ Activity-based costing Standard $ Custom $

Answer 1

	Standard	Custom
Direct labor	60000	103000
Machine hours	1400	1290
Set-up hours	96	400
Estimated overheads	300000
Machining activity	195000
Machine set up	105000
Plant wide method
Estimated overhead costs	300000
Direct labor costs	163000
% of direct labor costs	184.05%
Cost allocated
	Standard	Custom
Direct labor	60000	103000
Allocated costs	110429	189571
Activity based method
	Machining activity	Machine Set-up
Estimated overhead costs	195000	105000
Total hours	2690	496
Rate per hour	72.49	211.69
Cost allocated
	Standard	Custom
Machine hours	1400	1290
Allocation of Machining costs	101486.00	93512.10
Set-up hours	96	400
Allocation of Machine set-up costs	20322.24	84676.00
Total allocated costs	121808	178188
Difference	Standard	Custom
Allocation as per plant wide method	110429	189571
Allocation as per activity based method	121808	178188
Difference	-11379	11382

Plantwide allocation method uses one predetermined overhead rate to allocate over costs, regardless of the approach used to allocate overhead, a predetermined overhead rate is established

Activity based allocation method considers the cost driver rate which is cost pool total divided by cost driver. Per activity rate is identified. It identifies activities and assigns costs to each activity