Standard Custom A.) Compute the overhead rate using the traditional (plantwide)

Question

Standard

Custom

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.

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Wilkins 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 $42,100 $117,000 Machine hours 1,160 1,330 Setup hours 110 380
Total estimated overhead costs are $299,800. Overhead cost allocated to the machining activity cost pool is $199,900, and $99,900 is allocated to the machine setup activity cost pool.

Explanation / Answer

Standard Custom Total Overhead allocation Overhead rate A B C D D/C Direct labor costs $        42,100 $        117,000 $ 159,100 $                       299,800 $ 1.88435 Traditional Machine hours 1160 1330 2490 $                       199,900 $ 80.2811 Activity Based Setup hours 110 380 490 $                         99,900 $ 203.8776 Activity Based Traditional approach Standard Custom Total A B 42100*1.88435 117000*1.88435 Direct labor costs 79331 220469 299800 Activity Based Costing 1160*80.2811 1330*80.2811 Machine hours 93126.076 106773.863 199900 110*203.8776 380*203.8776 Setup hours 22426.536 77473.488 99900 Total 115553 184247 299800 Difference 36221 -36222

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