1. Saddle 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 (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each products use of cost drivers.

Standard Custom

Direct labor cost: $50,000 $100,000

Machine hours: 1,000. 1,000

Number of setups: 100 400

Total estimated overhead costs are $240,000. The overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool.

1. Compute the overhead rate using the traditional (plantwide) approach.

2. Compute the overhead rates using the activity-based costing approach.

3. What amount of overhead cost would be assigned to the standard and custom product lines using the ABC and traditional approach.