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Question $6$

Riley Inc. manufactures two types of hats: standard and custom. The controller uses a plantwide rate based on direct labor costs to allocate its overhead costs. Estimated direct labor costs to make the standard hats are $$100,000$ and estimated direct labor costs to make the custom hats are $$200,000.$ Total estimated overhead costs by the company are $$120,000.$

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 $-$

$\backslash$table$[[$Activity Cost Pools,Estimated Overhead,Cost Drivers,Use of Cost,Use of$],[,,$Cost Driver,Cost Driver,$],[,,$Standard,Custom,$],[$Machining$,$$$70,000,$Machine hours,$2,000,2,000],[$Machine setup,$$50,000,$Setup hours,$50,200]]$

Required:

Compute the overhead rate using the traditional approach.

$(2$ MARKS$)$

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

$(4$ MARKS$)$

Under the traditional basis, how much overhead is allocated to $($a$)$ the standards hats and $($b$)$ the custom hats?

$(2$ MARKS$)$

Under activity$-$based costing, how much overhead is allocated to $($a$)$ the standards hats and $($b$)$ the custom hats?

$(2$ MARKS$)$

$(10$ MARKS$)$