Question

Exercise 17-1 (Part Level Submission) 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 $103,000 Machine hours 1,240 1,490 Setup hours 109 370 Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $199,000, and $105,000 is allocated to the machine setup activity cost pool. (a) Your answer is correct. 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 Click if you would like to Show Work for this question: Open Show Work Show Solution Show Answer Link to Text Link to Text Attempts: 1 of 3 used (b) Your answer is correct. 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 Click if you would like to Show Work for this question: Open Show Work Show Solution Show Answer Link to Text Link to Text Attempts: 1 of 3 used (c) 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 $ Click if you would like to Show Work for this question:

Answer 1

• Requirement ‘a’ and ‘b’ are correct, although the same are provided below just for reference.
• Requriement ‘a’

$304,000	211.11%	of direct labor cost
$144,000

• Requirement ‘b’

Machining:
$199,000	$                  72.89	per machine hours
2730 machine hours
Machine Setup:
$105,000	$                219.21	per setup hours
479 setups

• Requirement ‘c’, along with work

Traditional Costing:
	Standard	Custom
$ 41000 x 211.11%	$86,555
$ 103000 x 211.11%		$217,443
Total OH allocation	$86,555	$217,443
Activity based Costing:
	Standard	Custom
Machining:
1240 MH x $ 72.89	$90,384
1490 MH x $ 72.89		$108,606
Machine Setup:
109 Setup hr x $ 219.21	$23,894
370 Setup hr x $ 219.21		$81,108
Total OH allocation	$114,277	$189,714