E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller
ID: 2343327 • Letter: E
Question
E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller has deeided 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. Pre- sented below is information related to the companys operations. C. Standard Custom Direct labor costs $50,000 $100,000 1,000 400 Machine hours Setup hours 1,000 100 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions (a) Compute the overhead rate using the traditional (plantwide) approach (b) Compute the overhead rates using the activity-based costing approach. (c) Determine the difference in allocation between the two approaches.Explanation / Answer
Ans:
1)overhead rate under traditional approach:
Traditional overhead rate:
= Estimated overhead / direct labor costs
= $240,000 / (50,000 +100,000)
= 160%
Therefore, 160% of the direct labor cost
2)overhead rates using the activity-based costing (ABC):
Calculate the machine hour under Activity based overhead rates:
Per Machine hour = Cost of machining / Number of machine hours
= $140,000 / 1,000 +1,000
= $70
So per machine hour is $70 under activity based overhead rates.
Calculate the machine setup under Activity based overhead rates:
Per machine setup =
Cost of machine setup / Number of machine setup hours
= $100,000 / 100+400
= $200
So, per machine setup hour is $200 under activity based overhead rates.
3)Difference in allocation between the two approaches:
Under traditional costing system:
Under Activity based costing system
Activity cost pools cost dirvers Estimated overheads Machining machine hours 1,40,000$ Mechine setup setup hours 1,00,000$Related Questions
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