E4.1 (LO 1, 2), AP 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 activitybased costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product's use of cost drivers. Direct labor costs Machine hours Number of setups Standard $50,000 1,000 1,000 400 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions 100 Custom $100,000 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. Explain difference between traditional and activity-based costing.
E4.1 (LO 1, 2), AP 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 activitybased costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each product's use of cost drivers. Direct labor costs Machine hours Number of setups Standard $50,000 1,000 1,000 400 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions 100 Custom $100,000 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. Explain difference between traditional and activity-based costing.
Chapter1: Financial Statements And Business Decisions
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The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Transcribed Image Text:E4.1 (LO 1, 2), AP 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 activitybased costing and wants to see how the results would differ if this
system were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The total
estimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to each
product's use of cost drivers.
Direct labor costs
Machine hours
Number of setups
Standard
$50,000
1,000
100
Custom
$100,000
1,000
400
Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 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.
Explain difference between traditional and activity-based costing.
tom Golumo
Expert Solution
Step 1 Introduction
Overhead rates - are the rates used to allocate the cost of overhead to the products produced by the entity. This rate is the rate that absorbs the costs of the product. Such a rate is determined by dividing the indirect cost or overhead cost by the base cost or units (i.e, labor hours or labor cost or machine hours, etc). In the case of allocation, each product's cost is determined by multiplying the overhead rate by the individual base of the product.
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