Issign overhead using E517 LO12Elle Inc makes two types of h

Issign overhead using E5.17 LO1.2)Elle Inc. makes two types of handbags: standard and custom. The controller has decided to use a raditional costing and plant-wide overhead rate based on direct labour costs. The president has heard of activity-based costing and wants to see ABC how the results would differ if this system were used. Two activity cost pools were developed: machining and machine set-up. Presented below is information related to the company\'s operations. Direct labour costs Machine hours Set-up hours Custom $100,000 1,000 400 500 100 Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to the machine set-up activity cost pool. Instructions a. Calculate the overhead rate using the traditional (plant-wide) approach. b. Calculate the overhead rate using the activity-based costing approach. e. Writing Explain the difference in allocation between the two approaches.

Solution

(a) Overhead rate using the traditional (plant wide) approach

Overhead rate = Total estimated overhead costs / Direct labor costs

= $277,500 / [ $50,000 + 100,000 ]

= $277,500 / 150,000

= 185% of direct labor cost

(b)Overhead rates using the activity-based costing approach

Activity-based overhead rates

Machining Activity

= Overhead cost allocated to the machining activity cost pool / Total Machine Hours

= $177,000 / [ 500 Machine hours + 1000 Machine Hours ]

= $177,000 / 1,500 Machine Hours

= $118 per machine hours

Machine setup

= Overhead cost allocated to the machining activity cost pool / Total Set up hours

= $100,500 / [ 100 set up hours + 400 set up hours ]

= $100,500 / 500 Set up hours

= $201 per set up hours

(c) Difference in allocation between the two approaches

Traditional costing

Standard

Custom

$50,000 x 185%

$92,500

-

$100,000 x 185%

-

$92,500

TOTAL

$92,500

$92,500

Activity-based costing

Standard

Custom

Machining:

500 Machine hours x $118

59,000

1000 Machine hours x $118

118,000

Machine setup:

100 Set up hours x $201

20,100

100 Set up hours x $201

8,400

TOTAL

79,100

198,400

Traditional costing	Standard	Custom
$50,000 x 185%	$92,500	-
$100,000 x 185%	-	$92,500
TOTAL	$92,500	$92,500
Activity-based costing	Standard	Custom
Machining:
500 Machine hours x $118	59,000
1000 Machine hours x $118		118,000
Machine setup:
100 Set up hours x $201	20,100
100 Set up hours x $201		8,400
TOTAL	79,100	198,400