Homework SourseSaddle 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.
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
$
per machine hour
Machine setup
$
per setup hour
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
$
Solution
Answers
A
Total estimated Overhead
$ 3,04,000.00
B
Total Direct Labor cost [58000 + 97000]
155000
C= A/B
Predetermined Overhead rate
$ 1.96
D = (A/B) x 100
% of direct labor cost
196.13%
Cost Pool
Overhead cost
Cost driver
Total cost drivers
Activity rates [Answer]
Machine Activity
$ 1,97,000.00
machine hours
1190 + 1220 = 2410 machine hours
197000/2410 = $ 81.74 per machine hours
Machine Setup
$ 1,07,000.00
setup hours
109 + 400 = 509 setup hours
107000/509 = $ 210.22 per setup hours
---traditional method
Standard
Custom
A
Predetermined Overhead rate
$1.96 per $ labor cost
$1.96 per $ labor cost
B
Direct labor cost
$ 58,000.00
$ 97,000.00
C=A x B
Total overhead allocated
$ 1,13,680.00
$ 1,90,120.00
---Activity based costing method
Standard
Custom
A
Predetermined Overhead rate
$1.96 per $labor cost
$1.96 per $labor cost
B
Direct labor cost
$ 58,000.00
$ 97,000.00
C=A x B
Total overhead allocated
$ 1,13,680.00
$ 1,90,120.00
Standard
Custom
A
Machine Activity cost pool rate
$81.74 per machine hours
$81.74 per machine hours
B
Total machine hours
1190
1220
C=A x B
Overhead allocated
$ 97,270.60
$ 99,722.80
D
Machine Setup activity rate
$ 210.22 per setup hours
$ 210.22 per setup hours
E
no. of setup hours
109
400
F=D x E
Overhead allocated
$ 22,913.98
$ 84,088.00
G = C + F
Total Overhead allocated
$ 1,20,184.58
$ 1,83,810.80
Overheads allocated
Traditional
Activity based Costing
Standard
$ 1,13,680.00
$ 1,90,120.00
Custom
$ 1,20,184.58
$ 1,83,810.80
| A | Total estimated Overhead | $ 3,04,000.00 |
| B | Total Direct Labor cost [58000 + 97000] | 155000 |
| C= A/B | Predetermined Overhead rate | $ 1.96 |
| D = (A/B) x 100 | % of direct labor cost | 196.13% |
