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 $107,000

Machine hours 1,120 1,200

Setup hours 100 430

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $196,000, and $108,000 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

Custom

Activity-based costing

Standard

Custom

Answer 1

for formulas and calculations, refer to the image below -

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