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Traditional Versus Activity-Based Costing

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Mathews 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 the 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 $300,000. Overhead cost allocated to the machining activity cost pool is $200,000, and $100,000 is allocated to the machine setup activity cost pool.
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.

How to set up and calculate ?

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Solution Summary

This solution illustrates how to compute the overhead allocated to two products under the traditional and activity-based approaches.