Elle Inc. has two types of handbags: standard and custom. The controller has dec

Question

Elle 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 $46,200 $44,500 Machine hours 1,190 1,140 Setup hours 98 400 Total estimated overhead costs are $299,900. Overhead cost allocated to the machining activity cost pool is $197,100, and $102,800 is allocated to the machine setup activity cost pool. Compute the overhead rates using the activity-based costing approach. Machining $ per machine hour?

Explanation / Answer

1)Compute the overhead rate using the traditional (plant wide) approach. (Round your answer to 3 decimal places, e.g. 190.105.)

Pre-determined overhead rate = Estimated overhead / Direct labor
=309,100 / (56,600+ 79,400)
=309,100 / 136,000
=227.279

2)Compute the overhead rates using the activity-based costing approach. (Round your answers to 3 decimal places, e.g. 73.150.)

machining =machining activity cost pool / machine hours
=196,600 / (1,250 + 1,200)

Machine SETUP = machine SETUP activity cost pool / SETUP hours

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