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Question - 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
$58,500
$113,000
Machine hours
1,250
1,400
Setup hours
110
420
Total estimated overhead costs are $297,300. Overhead cost allocated to the machining activity cost pool is $195,300, and $102,000 is allocated to the machine setup activity cost pool.
Compute the overhead rates using the activity-based costing approach.
Determine the difference in allocation between the two approaches.
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