Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead
E4-1 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.
Standard | Custom | |
Direct labor costs | $50,000 | $100,000 |
Machine hours | 1,000 | 1,000 |
Setup hours | 100 | 400 |
Total estimated overhead costs are $270,000 Overhead cost allocated to the machining activity cost pool is $170,000 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.
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Solution: Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to