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
