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.
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Standard |
Custom |
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Direct labor costs |
$53,200 |
$119,000 |
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Machine hours |
1,410 |
1,180 |
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Setup hours |
110 |
410 |
Total estimated overhead costs are $298,800. Overhead cost allocated to the machining activity cost pool is $199,800, and $99,000 is allocated to the machine setup activity cost pool.
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Instructions: (a) Compute the overhead rate using the traditional (plant wide) approach. |
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b) Compute the overhead rates using the activity-based costing approach. |
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(c) Determine the difference in allocation between the two approaches |
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