Reference no: EM132463243

Elle Inc. makes two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour 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 set-up. Presented below is information related to the company's operations.

Standard                                 Custom

Direct labour costs            ;50,000                       $100,000

Machine hours                   500                             1,000

Set-up hours                      100                              400

Total estimated overhead costs are $300,000. The overhead cost allocated to the machining activity cost pool is $174,000, and $126,000 Is allocated to the machine set-up activity cost pool.

Question 1: Calculate the overhead rate using the traditional (plant-wide) approach.

• Predetermined overhead rate % of direct labour cost

Question 2: Calculate the overhead rate using the activity-based costing approach.

• Cost Pool Overhead Rate
• Machining S per machine hour