Eric Parker has been studying his department’s profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company’s approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,133,500 is based on 45,340 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools.

Required

a. Calculate the company’s traditional overhead rate based on machine hours.

b. Calculate the company’s overhead rates using the proposed activity-based costing pools.

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Cost Pool Expected Cost Expected Activities Product assembly Machine setup and calibration Product inspection Raw materials storage $ 680,000 40,000 machine hours 320,000 5,000 setups 1,500 batches 67,500 66,000 300,000 pounds $ 1,133,500