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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.