Elle 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 $300,000. Overhead cost allocated to the machining activity cost pool is $200,000, and $100,000 is allocated to the machine setup activity cost pool.Compute the overhead rate using the traditional approach.