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. Determine the difference in allocation between the two approaches. (Round your answer to 0 decimal places, e.g. 12,200.) Traditional Costing Standard $ Custom $ Activity Based Costing Standard $ Custom $

Explanation / Answer

Compute the overhead rates using the activity-based costing approach. (Round your answers to 3 decimal places, e.g. 73.150.) Machining: 197,100/(1190+1140) = $84.597 per machine hour Machine setup: 102,800(400 + 98) = $206.426 per machine setup Determine the difference in allocation between the two approaches. (Round your answer to 0 decimal places, e.g. 12,200.) Standard: 84.597*1190 + 206.426*98 = $120,900 Custom: 84.597*1140 + 206.426*400 = $179,011 Traditional Costing 299,900/(46200 + 44500) = $3.307 per direct labor dollar Standard: $3.307*46,200 = $152,783 Custom: $3.307*$44,500 = $147,162

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