Saddle Inc. has two types of handbags: standard and custom. The controller has d
ID: 2339697 • Letter: S
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
Total estimated overhead costs are $ 289,200. Overhead cost allocated to the machining activity cost pool is $ 192,000, and $ 97,200 is allocated to the machine setup activity cost pool.
Compute the overhead rates using the activity-based costing approach.
$ enter a dollar amount per machine hour
$ enter a dollar amount per setup hour
Standard
Custom
Direct labor costs $ 50,000 $ 100,000 Machine hours 1,200 1,200 Setup hours 120 420Explanation / Answer
Answer:
Activity cost pools
overhead rates
Machining
80
per machine hour
Machine setup
180
per setup hour
Working notes for the answer:
Overhead rates using the activity-based costing approach
Activity cost pools
Estimated overhead
Cost drivers
A
B
C=A/B
Machining
192000
2400Machine hours (1200+1200)
80
Machine setup
97200
540
Setup hours (120+420)
180
Activity cost pools
overhead rates
Machining
80
per machine hour
Machine setup
180
per setup hour
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