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Exercise 4-1 (Video) Saddle Inc

Accounting

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Exercise 4-1 (Video)

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.
 

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.