Exercise 18-1

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 and machine setup. Presented below is information related to the companys operations.

	Standard	Custom
Direct labor costs	$41,000	$99,000
Machine hours	1,430	1,330
Setup hours	110	420

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $107,000 is allocated to the machine setup activity cost pool.

a.) Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.)

Predetermined overhead _____% of direct labor cost

b.) Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.)

Machining $_____ per machine hour

Machine setup $_____ per setup hour

c.) Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)

Traditional costing
Standard	$ _____
Custom	$ _____

Activity-based costing
Standard	$ _____
Custom	$ _____