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

Answer:(a) Calculation of the overhead rate using the traditional (plantwide) approach.

Pre-determined overhead rate = Estimated overhead / Direct labor
=298600 / (55,200+ 117,000)
=298600/ 172200
=173.40%

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