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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 $59,000 $112,000
Machine hours 1,380 1,110
Setup hours 101 370
Total estimated overhead costs are $309,000. Overhead cost allocated to the machining activity cost pool is $200,000 and $109,000 is allocated to the machine setup activity cost pool.
(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 between the two approaches.

Answer :

Anthougogo

Answer:

Saddle Inc.

a) The overhead rate using the traditional (plantwide) approach is:

= $1.81 per direct labor cost.

b) The overhead rates using the activity-based costing approach:

Machining activity          =  $80.32

Machine setup activity =   $231.42

c) The traditional approach overallocated total overhead by $515 than the activity-based approach.

Under the traditional approach, overhead allocated to the Custom product was $27,940 more than under the activity-based approach.

Similarly, under the activity-based approach, overhead allocated to the Standard product was $27,425 more than under the traditional approach.

The difference in the two being the overallocated overhead of $515 stated above.

Explanation:

a) Data and Calculations:

Estimated overhead costs = $309,000

Overhead allocated:

Machining activity = $200,000

Machine setup activity = $109,000

                                Standard        Custom      Total

Direct labor costs    $59,000     $112,000    $ 171,000

Machine hours              1,380             1,110          2,490

Setup hours                      101              370              471

Overhead rate using plantwide approach:

Total overhead/Total direct labor costs

= $309,000/$171,000 = $1.81 per direct labor cost

Overhead rates, using activity-based costing:

Machining activity          =  $80.32  ($200,000/2,490)

Machine setup activity =   $231.42 ($109,000/471)

Overhead Allocation

                                Standard        Custom                  Total

Plantwide                $106,790      $202,720              $309,510

                      ($59,000 * $1.81)   ($112,000 * $1.81)  

Activity-based:

Machining              $110,842          $89,155              $199,997

                         (1,380 * $80.32)   (1,110 * $80.32)

Machine setup         23,373            85,625                108,998

                         (101 * $231.42)     (370 * $231.42)

Total costs            $134,215          $174,780            $308,995

Difference            $27,425            $27,940                 $515

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