Standard Custom (a) Wilkins Inc. has two types of handbags: standard and custom.

Question

Standard

Custom

(a)

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 $55,200 $117,000 Machine hours 1,340 1,370 Setup hours 98 420
Total estimated overhead costs are $298,600. Overhead cost allocated to the machining activity cost pool is $198,900, and $99,700 is allocated to the machine setup activity cost pool.

Explanation / Answer

Overhead rate based on direct labor costs

+298600/(55200+117000)*55200

=$95,718

298600/(55200+117000)*117000

=2,02,882

Plantwide Overhead allocation Direct labour cost % Direct labour cost Standard

+298600/(55200+117000)*55200

=$95,718

$55,200 173% Custom

298600/(55200+117000)*117000

=2,02,882

$1,17,000 173%

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