Celia 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 set-up. Presented below is information related to the company's operations Standard Custom
Direct Labor cost 60,000 $ 12,000
Machine Hours 1,500 1,500
Set-up Hours 100 500
Total estimated overhead cost are $342,000. Overhead cost allocated to the machining activity cost pool is $222,000 and $120,000 is allocated to the machine set-up activity cost pool
1. Calculate overhead allocated to each product using the traditional (Plant-wide) approach
2. Calculate overhead allocated to each product using the activity based costing approach

Instructions are below.

Explanation:

Giving the following information:

Standard Custom

Direct Labor cost 60,000 $ 12,000

Machine Hours 1,500 1,500

Set-up Hours 100 500

The total estimated overhead costs are $342,000.

A. First, we need to calculate the predetermined overhead rate:

Total direct labor cost= $72,000

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 342,000/72,000

Predetermined manufacturing overhead rate= $4.75 per direct labor dollar

Standard= 4.75*60,000= $285,000

Custom= 4.75*12,000= $57,000

B. Now, we need to calculate a predetermined overhead rate for each activity:

Machining:

Total machine-hours= 3,000

Total overhead= 222,000

predetermined overhead rate= 222,000/3,000

predetermined overhead rate= $74 per machine-hour

Setup:

Total set-up hours= 600

Total overhead= 120,000

predetermined overhead rate= 120,000/600

predetermined overhead rate= $200 per set up-hour

Standard= 74*1,500 + 200*100= $131,000

Custom= 74*1,500 + 200*500= $211,000