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 $44,800 $119,000 Machine hours 1,470 1,240 Setup hours 110 400
Total estimated overhead costs are $301,100. Overhead cost allocated to the machining activity cost pool is $195,300, and $105,800 is allocated to the machine setup activity cost pool.

Explanation / Answer

Total Direct Labour cost = $44800 + $119000 = $163800 Standard Predermined overhead rate = (Direct labour cost of Standard / Total direct labour cost)*100 Standard Predermined overhead rate = (44800 / 163800)*100 = 27.35% of direct labour cost Custom Predermined overhead rate = (Direct labour cost of Custom / Total direct labour cost)*100 Custom Predermined overhead rate = (119000 / 163800)*100 = 72.65% of direct labour cost

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