The following cost information is available for Senkowski Ltd.:

Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour.

Required
A. Management is trying to decide between using the traditional allocation method based on direct labor hours or activity-based costing. Calculate the overhead rates based on each method.
B. One particular batch of 40 luxury handbags had the following specifications:
Direct labor hours .......... 8
Purchase orders ........... 4
Shipments received ........ 3
Setups ............. 2
Inspections ........... 12
Calculate the overhead to be allocated to the bags under traditional and activity-based costing techniques.
C. Which costing method do you think is better for the company?Why?

Transcribed Image Text:

Activity Purchasing Receiving Machine setups Quality control Allocation Base Purchase orders Shipments received Setups Inspection:s Volume of Activity Overhead Cost 30,000 15,000 2,500 18,000 $150,000 60,000 200,000 90,000