Overhead rate using traditional approach=$300,000/ ($51,000+$112,000)=$300,000/$
ID: 372909 • Letter: O
Question
Overhead rate using traditional approach=$300,000/ ($51,000+$112,000)=$300,000/$163,000=1.84
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Overhead rate using ABC
Overhead cost on machine=$197,000/(1420+1470)=68.17
Machine setup= $103,000/(103+370)=217.76
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Traditional costing
Standard=51,000*1.84=$93840
Custom= 112,000*1.84=$206,080
ABC system
Standard=1420*68.17+103*217.76=$119,230
Custom=1470*68.17+370*217.76=$180,781
Explanation / Answer
Saddle 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 Machine hours Setup hours $51,000 1,420 103 112,000 1,470 370 Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $103,000 is allocated to the machine setup activity cost pool Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.) Predetermined overhead rate % of direct labor cost Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.) Machining Machine setup Determine the difference in allocation between the two approaches. (Round answers to o decimal places, e.g. 1,225.) per machine hour per setup hour Standard Custom Activity-based costing Standard Custom
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