E4-1B Celia 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. Pre- sented below is information related to the company's operations. Direct labor costs Machine hours Setup hours Standard Custom $60,000 $120,000 1,500 1,500 100 500 Total estimated overhead costs are $342,000. Overhead cost allocated to the machining activity cost pool is $222,000, and $120,000 is allocated to the machine setup activity cost pool. Instructions (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach. (c) Determine the difference in allocation between the two approaches.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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E4-1B Celia 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. Pre-
sented below is information related to the company's operations.
Direct labor costs
Machine hours
Setup hours
Standard Custom
$60,000
$120,000
1,500
1,500
100
500
Total estimated overhead costs are $342,000. Overhead cost allocated to the machining
activity cost pool is $222,000, and $120,000 is allocated to the machine setup activity
cost pool.
Instructions
(a) Compute the overhead rate using the traditional (plantwide) approach.
(b) Compute the overhead rates using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.
Transcribed Image Text:E4-1B Celia 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. Pre- sented below is information related to the company's operations. Direct labor costs Machine hours Setup hours Standard Custom $60,000 $120,000 1,500 1,500 100 500 Total estimated overhead costs are $342,000. Overhead cost allocated to the machining activity cost pool is $222,000, and $120,000 is allocated to the machine setup activity cost pool. Instructions (a) Compute the overhead rate using the traditional (plantwide) approach. (b) Compute the overhead rates using the activity-based costing approach. (c) Determine the difference in allocation between the two approaches.
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