E4-1 Assign overhead using traditional costing and ABC

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 was used. Two activity cost pools were developed: machining and machine

setup. Presented below is information related to the company's operations.

Standard

Custom

Direct labor costs

$50,000

$100,000

Machine hours

1,000

1,000

Setup hours

100

400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is

$140,000 and $100,000 is allocated to the machine setup activity cost pool.

Instructions

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

(b) Compute the overhead rates using the activity-based costing approach.

(c) Determine the difference in allocation between the two approaches.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

E4-1 Assign overhead using traditional costing and ABC

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 was used. Two activity cost pools were developed: machining and machine

setup. Presented below is information related to the company's operations.

Standard

Custom

Direct labor costs

$50,000

$100,000

Machine hours

1,000

1,000

Setup hours

100

400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is

$140,000 and $100,000 is allocated to the machine setup activity cost pool.

Instructions

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

(b) Compute the overhead rates using the activity-based costing approach.

(c) Determine the difference in allocation between the two approaches.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

After you have completed E4-1, consider the additional question.

1.Assume that total estimated overhead costs are 285,000. Overhead cost allocated to the machining activity cost pool is $150,000 and 135,000 is allocated to the machine setup activity cost pool. Redo instructions (a) to (c)

E4-4 - Assign overhead using traditional costing and ABC

Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to

assign to each product line, the controller, Robert Hermann, has developed the following information.

Car

Truck

Estimated wheels produced

40,000

10,000

Direct labor hours per wheel

1

3

Total estimated overhead costs for the two product lines are $770,000.

Instructions

(a) Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours

is used to allocate overhead costs.

(b) Hermann is not satisfied with the traditional method of allocating overhead because he believes that most

of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops

the following three activity cost pools and related cost drivers to better understand these costs.

Expected Use of

Estimated Overhead

Activity Cost Pools

Cost Drivers

Costs

Setting up machines

1,000 setups

$220,000

Assembling

70,000 labor hours

280,000

Inspection

1,200 inspections

270,000

Compute the activity-based overhead rates for these three cost pools.

(c) Compute the cost that is assigned to the car wheels and truck wheels product lines using an activity-based

costing system, given the following information.

Expected Use of Cost Drivers per Product

Car

Truck

Number of setups

200

800

Direct labor hours

40,000

30,000

Number of inspections

100

1,100

(d) What do you believe Hermann should do?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

After you have completed E4-4, consider the additional question.
1.	Assume that total estimated overhead costs changed to $850,000 and the estimated overhead for
	Setting up machines and Assembly changed to $260,000 and $320,000 respectively. Redo instruction
	(a) to (c). Round overhead rates to two decimal points.