Wilkins 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 $50,000 $100,000
Machine hours 1,000 1,000
Setup hours 100 400
Total estimated overhead costs are $270,000. Overhead cost allocated to the machining activity cost pool is $170,000, and $100,000 is allocated to the machine setup activity cost pool.
(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.