E17.1 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.
Assign overhead using traditional costing and ABC.
Standard |
Custom |
|||
Direct labor costs |
|
$50,000 |
|
$100,000 |
Machine hours |
1,000 |
1,000 |
||
Setup hours |
100 |
400 |
Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool.
Instructions
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 in allocation between the two approaches.
a. overhead allocation using traditional system
standard | custome | |
overhead cost |
80,000 (240,000 x 5/15) |
160,000 (240,000 x 10/15) |
b. overhead allocation using activity-based costing
activity | cost | basis of allocation | standard | custom |
machining activity | 140,000 | machine hour | 70,000 (140,000 x1/2) | 70,000 (140,000 x1/2) |
machine setup | 100,000 | setup hour | 20,000 (100,000 x 1/5) | 80,000 (100,000 x 4/5) |
total cost | 90,000 | 150,000 |
c. difference between two approaches
Products | traditional system | activity-based cost |
standard | 80,000 | 90,000 |
custom | 160,000 | 150,000 |
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