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Salatic Co has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs.
Salatic Co 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 system 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 | Total | ||||||
Direct labor costs | $ 420,000 | $ 252,000 | $ 672,000 | |||||
Machine hours | 21,000 | 31,500 | 52,500 | |||||
Setup hours | 1,050 | 840 | 1,890 | |||||
Total estimated overhead costs | $ 470,400 | |||||||
Overhead cost allocated to machining cost pool | $ 336,000 | |||||||
Overhead cost allocated to setup cost pool | $ 134,400 | |||||||
Requirement: | ||||||||
1 | Compute overhead costs allocated to each product using traditional (plantwide) approach | |||||||
2 | Compute overhead costs allocated to each product using ABC approach | |||||||
3 | Determine the difference and comment on the results. |
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