Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour 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 set-up. Presented below is information related to the company's operations.

Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to the machine set-up activity cost pool.
Instructions
(a) Calculate the overhead rate using the traditional (plant-wide) approach.
(b) Calculate the overhead rate using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.

Transcribed Image Text:

Direct labour costs Machine hours Set-up hours Standard $50,000 500 100 Custom $100,000 1,000 400