Exercise 41 Saddle Inc has two types of handbags standard an

Exercise 4-1 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 Customm Direct labor costs Machine hours Setup hours $42,000 1,200 96 $101,000 1,270 400 Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $200,000, and $100,000 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 per machine hour per setup hour

Solution

a. Predetermined overhead rate 209.79% of direct labor costs Working; a. Standard Custom Total Direct Labor costs $              42,000 $       1,01,000 $       1,43,000 b. Predetermined overhead rate = Total Overhead Costs/ Total Direct Labor costs = $       3,00,000 / $   1,43,000 = 209.79% b. Machining $                 80.97 per machine hour Machine Setup $              201.61 per setup hour Working; Working: a. Standard Custom Total Machine hours                     1,200                 1,270                 2,470 Setup hours                           96                     400                     496 b. Allocated Overhead costs Number of activity driver Costs per activity driver Machining $       2,00,000              2,470 $             80.97 Machine Setup $       1,00,000                 496 $           201.61 c. Traditional Costing: Standard $              88,112 Custom $           2,11,888 Activity-based costing: Standard $           1,16,521 Custom $           1,83,479 Working: Standard Custom Total Overhead Costs a. Traditional Costing: Overhead rate Direct Labor costs Overhead Direct Labor costs Overhead Costs a b c=b*a d e=d*a Overhead Costs 209.79% $           42,000 $       88,112 $       1,01,000 $       2,11,888 $ 3,00,000 b. Activity-based costing: Standard Custom Total Overhead Costs Activity rate Quatity of activity driver Overhead Costs Quatity of activity driver Overhead Costs Machining $                 80.97                 1,200 $       97,166                 1,270 $       1,02,834 $ 2,00,000 Machine Setup $              201.61                       96 $       19,355                     400 $           80,645 $ 1,00,000 $   1,16,521 $       1,83,479 $ 3,00,000