E4-1Wilkins
Inc. has two types of handbags: standard and custom. The controller has decided
to use a plant wide 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
|
$50,000
|
$100,000
|
|
Machine hours
|
1,000
|
1,000
|
|
Setup hours
|
100
|
400
|
Total estimated overhead costs are $270,000 Overhead
cost allocated to the machining activity cost pool is $170,000 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.
TUTORIAL PREVIEW
a. Compute the overhead rate using the traditional (plantwide) approach
|
Estimeted
overhead
|
Predetermined
overhead rate
|
|
Direct
labor costs
|
|
$270,000
|
180% of
direct labor
|
|
($50,000 +
$100,000)
|
