Saddle Inc has two types of handbags standard and custom The

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 $58,000 $97,000

Machine hours 1,190 1,220

Setup hours 109 400

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $107,000 is allocated to the machine setup activity cost pool.

Questions in Image:

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 LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining Machine setup $ per machine hour per setup hour LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR EXERCISE Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, eg:1225.) Traditional costing Standard Custom Activity-based costing Standard Custom

Solution

a. Predetermined Overhead rate 196.13% of direct labor costs Working: 1) Total Labor costs = $                         58,000 + $                         97,000 = $       1,55,000 2) Total Overhead costs = $       3,04,000 3) Predetermined Overhead rate = Total Overhead costs / Total Labor costs = $                      3,04,000 / $ 1,55,000 = 196.13% b. Overhead Rate: Machining $ 81.74 per machine hour Machine Set ups $ 210.22 per setup hour Working: Cost Pools Overhead costs Number of Activity drivers Cost per activity driver Machining $              1,97,000                         2,410 $             81.74 (1190+1220) Machine Set up $              1,07,000                             509 $           210.22 (109+400) c. Traditional costing; Standard $ 1,13,755 Custom $ 1,90,245 Activity-based Costing: Standard $ 1,20,187 Custom $ 1,83,813 Working: 1) Allocation of overhead under traditional approach; Product Standard Custom Direct Labor costs $                         58,000 $                         97,000 Overhead recovery rate 196.13% 196.13% Overhead Costs $                      1,13,755 $                      1,90,245 2) Allocation of overhead costs under Activity-Cost based approach: Standard Custom Actiivty Rate Number of Activity Costs Number of Activity Costs Machining $                    81.74                                1,190 $                  97,274                                1,220 $     99,726 Machine Setups $                  210.22                                    109 $                  22,914                                    400 $     84,086 Total $               1,20,187 $ 1,83,813