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 $45,000 $113,000 Machine hours 1,140 1,110 Setup hours 106 430 Total estimated overhead costs are $308,000. Overhead cost allocated to the machining activity cost pool is $195,000, and $113,000 is allocated to the machine setup activity cost pool. Incorrect answer. Your answer is incorrect. Try again.

Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate:

Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.)

Machining:

Machine setup:

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

Standard:

Custom:

Answer 1

Predetermined overhead rate

195%

of direct labor cost

Working:

Total direct labor Cost = $45,000 + $113,000 = $158,000

Total overhead costs = $308,000

Overheads as % of direct labor = ($308,000 / $158,000) x 100 = 195%

2.

Machining	$86.67	per machine hour
Machine setup	$210.82	per setup hour

Working:

Total machining cost	195000
Total machine hours	2250
Machining cost per machine hour	$86.67
Total machine setup cost	113000
Total setup hours	536
Machine set up cost per setup hour	$210.82

	Traditional	Activity based	Difference
Standard	87750	121147	-33397
Custom	220350	186853	33497

Working:

Traditional method
	Standard	Custom
Direct labor	45000	113000
Overhead (@195% of direct labor)	87750	220350
Activity based costing
	Standard	Custom
Machine hours	1140	1110
Machining cost per machine hour	$86.67	$86.67
Machining cost	98800	96200
Machine setup hours	106	430
Machine setup cost per setup hour	$210.82	$210.82
Setup cost	22347	90653
Total overhead costs	121147	186853