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.

Total estimated overhead costs are $240,000. Overhead costs allocated to the machining activity cost pool are $140,000, and $100,000 is allocated to the machine setup activity cost pool.

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

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

Determine the difference in allocation between the two approaches.

	Standard	Custom
Direct labor costs	$50,000	$100,000
Machine hours	1,000	1,000
Setup hours	100	400