Answer:
A.) Overhead rate = 200% of direct labor cost.
B.) $67.5 per machine hour ; $180 per setup
C.) The traditional costing applies overhead burden rate equally to all products which might sometimes give a vague picture of production cost especially that which is applied to each different product.
With the activity based costing method we could see that machining activity setup rate about 26 times the machining activity rate.
Explanation:
Overhead rate using the plantwide approach
Overhead rate = (estimated overhead cost ÷ direct labor cost)
Overhead rate = ($450,000) ÷ (75,000 +150,000)
Overhead rate = $450,000 ÷ $225,000
Overhead rate = 200% of direct labor cost.
B.) Using activity costing
machining activity cost pool = $270,000
machine setup activity cost pool = $180,000
Total Machining activity hours = (2000 + 2000) = 4000
Total machine setup activity hours = (200 + 800) = 1000
Machining activity rate = (cost /hours) :
$270,000/4000 = $67.5 per machine hour
Machining activity setup rate = (cost /hours) :
$180,000/ 1000 = $180 per setup
