Response to the following problem:
Senkowski Ltd. cost information: Activity-Purchasing, Allocation Base -Purchase orders, Volume of Activity 30,000, Overhead costs $150,000. Activity-Receiving, Allocation base Shipments received, Volume of Activity 15,000, Overhead Cost 60,000. Activity-Machine setups, Allocation Base-Setups, Volume of Activity 2,500, Overhead costs 200,000. Activity- Quality control, Allocation base Inspections, Volume of Activity 18,000, Overhead costs 90,000. Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags. There were 12, 500 direct labor hours, each of which was charged to inventory at $18 per hour. A. Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing. Calculate the overhead rates for each method. B. One particular batch of 40 luxury handbags had the following specifications: direct labor hours 8, purchase orders 4, shipments received 3, setups 2, inspections 12.
Calculate the overhead to be allocated to the bags under the traditional and activity-based costing techniques.
Which costing method do you think is better for the company? Why?