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 costs $43,700 $102,000
Machine hours 1,500 1,380
Setup hours 96 440
Total estimated overhead costs are $298,400. Overhead cost allocated to the machining activity cost pool is $195,100, and $103,300 is allocated to the machine setup activity cost pool.
(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.
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