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 "?" . (a) Estimated overhead = Predetermined overhead rate Direct Labor Costs = of direct labor cost (b) Activity cost pools Cost drivers Estimated overhead Machining Machine hours $140,000 Machine setup Setup hours 100,000 Activity-based overhead rates Machining: = per machine hour Machine setup: = per setup hour (c) Traditional costing Standard Custom $50,000 x POH rate $100,000 x POH rate Total OH allocation Activity-based costing Standard Custom Machining: 1,000 MH x OH rate 1,000 MH x OH rate Machine setup: 100 Setup Hr x OH rate 400 Setup Hr x OH rate Total OH allocation