Reference no: EM133184671

Question - Pharoah 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 (machine hours) and machine set-up (number of set- ups). The total estimated machine hours is 1,500, and the total estimated number of setups is 500. 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.

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

Compute the overhead rates using the activity-based costing approach.

Determine the difference in allocation between the two approaches.