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 company's operations.

Standard Custom

Direct labor costs $ 40,000 $ 110,000

Machine hours 1,450 1,460

Setup hours 103 370

Total estimated overhead costs are $ 295,000 . Overhead cost allocated to the machining activity cost pool is $ 196,000 , and $ 99,000is allocated to the machine setup activity cost pool.

1. Determine the difference in allocation between the two approaches.

Traditional costing

Standard$

Custom$

Activity-based

costing

Standard$

Custom

2.Perdon Corporation manufactures safeslarge mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead.

Mobile Safes Walk-in Safes

Units planned for production 190 51

Material moves per product line 290 300

Purchase orders per product line 450 360

Direct labor hours per product line 810 1,690

The total estimated manufacturing overhead of $280,000was comprised of $170,000for materials handling costs and $110,000for purchasing activity costs. Under activity-based costing (ABC)

(a)One mobile safe

(b)One walk-in safe