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.
Direct labor cost for standard are $55,500, machine hours are 1,150, and setup hours are 100. For custom, the direct labor costs are 97,200, machine hours are 1,270, and setup hours are 380.
Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $195300, and $108,700 is allocated to the machine setup activity cost pool.
Instructions
(a) Compute the overhead rate using the traditional (plantwide) approach. The predetermined overhead rate is _____% of direct labor cost
(b) Compute the overhead rates using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.