Saddle Inc. has two types of handbags: standard and custom. The controller has d

Question

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 50,000 1,200 120 100,000 1,200 420 Total estimated overhead costs are $ 305,400.Overhead cost allocated to the machining activity cost pool is $ 192,000, and $ 113,400 is allocated to the machine setup activity cost pool Your answer is correct. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, eg. 12.25.) Predetermined overhead rate % of direct labor cost 203.60 Attempts: 2 of 4 used

Explanation / Answer

a) Predetermined overhead rate (305400/150000) 203.60% b) Compute the overhead rates using activity based costing approach Machining overhead cost for machining 192000 Machine hours (1200+1200) 2400 Machining cost per machine hour 80 Machine setups overhead cost for setups 113400 Setup hours (120+420) 540 Machine setup cost per setup hour 210 c) Traditional system Standard (50000*203.60%) 101800 Custom (100000*203.60%) 203600 Standard Custom Total Rate per driver number of driver Total cost Rate per driver number of driver Total cost Machining 80 1200 96000 80 1200 96000 192000 Machine setups 210 120 25200 210 420 88200 113400 Total 121200 184200 305400 Overhead cost (ABC) Standard 192000 Custom 113400 Total 305400 Difference Traditional ABC Difference Standard 101800 192000 -90200 Custom 203600 113400 90200 305400 305400 0

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