E4.1 (LO 1, 2), AP Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overheadrate based on direct labor costs. The president has heard of activitybased costing and wants to see how the results would differ if thissystem were used. Two activity cost pools were developed: machining (machine hours) and machine setup (number of setups). The totalestimated machine hours is 2,000, and the total estimated number of setups is 500. Presented below is information related to eachproduct's use of cost drivers.Direct labor costsMachine hoursNumber of setupsStandard$50,0001,000100Custom$100,0001,000400Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 isallocated to the machine setup activity cost pool.Instructionsa. 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

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Description: E4.1 (LO 1, 2), AP Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overheadrate based on direct labor costs. The president has heard of activitybased costing and wants to see how the results

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Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter4: Activity-based Costing

Section: Chapter Questions

Problem 4CE: Larsen, Inc., produces two types of electronic parts and has provided the following data: There are...

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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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