Exercise 171 Saddle Inc has two types of handbags standard a

Exercise 17-1 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 Machine hours Setup hours s50,000 1,390 105 $119,000 1,280 380 Total estimated overhead costs are $306,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $109,000 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 Machine setup s per machine hour per setup hour Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.) Traditional costin Standard Custom Act Standard Custom costi Click if you would like to Show Work for this question: Open Show Work

Solution

a. compute the overhead rates using traditional (plantwide) approach.

predetermined overhead rate = estimated overhead cost / total direct labour cost * 100

=>$306,000 / ($50,000 + $119,000) *100

=>$306,000 / 169,000 * 100

=>181.07%. of direct labour cost.

b.compute overhead rates using activity based costing:

c.

traditional costing:

activity based costing:

cost to be allocated = (machine hours * ABC rate per machine hour) + (setup hours * ABC rate per setup hour)

machining (allocation to machining activity / total machine hours) => (197,000 / (1390 + 1280))	$73.78 per machine hour
machine set up (allocation to setup / total set ups) =>($109,000 / (105 + 380))	$224.74 per set up hour