Answer:
Saddle Inc.
1. Overhead rate using the traditional (plantwide) approach is:
= $1.84
2. The overhead rates using activity-based costing approach are:
Machining = $72.49
Machine setup = $211.69
3. The difference in allocation between the two approaches:
Differences:
ABC approach $121,808 $178,188 $299,996
Using plantwide $110,400 $189,520 $299,920
Differences $11,408 -$11,332 $76
Explanation:
a) Data and Calculations:
Total estimated overhead costs = $300,000
Machining activity = $195,000
Machine setup activity = $105,000
Standard Custom Total
Direct labor costs $60,000 $103,000 $163,000
Machine hours 1,400 1,290 2,690
Setup hours 96 400 496
Overhead rate based on direct labor costs = $1.84 ($300,000/163,000)
Overhead rates using activity-based costing approach:
Machining = $72.49 ($195,000/2,690)
Machine setup = $211.69 ($105,000/496)
Allocation of overhead costs:
Standard Custom Total
Using plantwide $110,400 $189,520 $299,920
Using ABC:
Machining $101,486 $93,512 $194,998
Machine setup 20,322 84,676 104,998
Total costs $121,808 $178,188 $299,996
Differences:
ABC approach $121,808 $178,188 $299,996
Using plantwide $110,400 $189,520 $299,920
Differences $11,408 -$11,332 $76
