Wilkins 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
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Custom
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Direct labor costs
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$53,200
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$119,000
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Machine hours
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1,410
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1,180
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Setup hours
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110
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410
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Total estimated overhead costs are $298,800. Overhead cost allocated to the machining activity cost pool is $199,800, and $99,000 is allocated to the machine setup activity cost pool.
Instructions:
a) Compute the overhead rate using the traditional (plant wide) approach.
b) Compute the overhead rates using the activity-based costing approach.
c) Determine the difference in allocation between the two approaches