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Homework answers / question archive / Exercise 4-1 (Video) Saddle Inc
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 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. Presented below is information related to the company’s operations.
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Standard |
Custom |
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| Direct labor costs | $50,000 | $100,000 | ||
| Machine hours | 1,500 | 1,200 | ||
| Setup hours | 120 | 420 |
Total estimated overhead costs are $297,000. Overhead cost allocated to the machining activity cost pool is $189,000, and $108,000 is allocated to the machine setup activity cost pool.
Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.)
Compute the overhead rates using the activity-based costing approach.
Determine the difference in allocation between the two approaches.
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Estimated overhead
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= | Predetermined overhead rate |
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Direct labor costs
|
||
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$297,000
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= | 198.00% of direct labor cost |
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$50,000 + $100,000
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[$297,000 ÷ ($50,000 + $100,000) = 198.00%]
[Est. OH ÷ (Std. DL costs + Custom DL costs) = Predet. OH rate as a % of DL cost]
part b
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Activity cost pools
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Cost drivers
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Estimated overhead
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||
| Machining | Machine hours | $189,000 | ||
| Machine setup | Set up hours | 108,000 |
| Activity-based overhead rates | ||||||
| Machining: | Machine setup: | |||||
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$189,000
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= | $70 per machine hour |
$108,000
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= | $200 per setup hour | |
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1,500 + 1,200
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420 + 120
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[(Mach.: $189,000 ÷ (1,500 + 1,200) = $70); (Mach. setup: $108,000 ÷ (420 + 120) = $200)]
[(Mach.: Est. OH ÷ (Std. MH + Custom MH) = OH rate/MH); (Mach. setup: Est. OH ÷ (Custom setup hrs. + Std. setup hrs.) = OH rate/setup hr.)]
part c
| Traditional costing |
Standard
|
Custom
|
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| $50,000 × 198.00% |
$99,000
|
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| $100,000 × 198.00% |
$198,000
|
|||
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$99,000
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$198,000
|
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| Activity-based costing | ||||
| Machining: | ||||
| 1,500 × $70 |
$105,000
|
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| 1,200 × $70 |
$84,000
|
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| Machine setup: | ||||
| 120 × $200 |
24,000
|
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| 420 × $200 |
84,000
|
|||
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$129,000
|
$168,000
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