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Question - Saddle 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
$41,000
$99,000
Machine hours
1,430
1,330
Setup hours
110
420
Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,000, and $107,000 is allocated to the machine setup activity cost pool.
Required - Determine the difference in allocation between the two approaches.
a. Traditional costing
b. Activity-based costing
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