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E4-1 Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide 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.

 

 

Standard

Custom

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.

 

Instructions:

( a)Compute the overhead rate using the traditional (plantwide) approach.

(b)Compute the overhead rates using the activity-based costing approach.

 

(c)Determine the difference in allocation between the two approaches.

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