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E4-1
Saddle Inc. has two types of handbags: standard and custom. The
controller has decided to use a plant wide 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
Standard Custom
$50,000 $100,000
Machine hours
Setup hours
1,000
100
1,000
400
Total estimated overhead costs are $240,000. Overhead cost allocated to
the machining activity cost pool is $140,000, and $100,000 is allocated
to the machine setup activity cost pool.
Instructions:
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.
E4-6
Santana Corporation manufactures snowmobiles in its Blue Mountain,
Wisconsin, plant. The following costs are budgeted for the first quarter's
operations.
Machine setup, indirect materials
4,000