Elle Inc. makes 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 companys operations.

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

Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $169,500, and $108,000 is allocated to the machine set-up activity cost pool.

(a)

Calculate the overhead rate using the traditional (plant-wide) approach.

Predetermined overhead rate

% of direct labour cost

(b)

Calculate the overhead rate using the activity-based costing approach.

Cost Pool		Overhead Rate
Machining		$	per machine hour
Machine set-up		$	per set-up hour