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.