Exercise 4.1 and 4.3

Assign oven costing and Ex E4.1 (LO 1, 2), AP 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 $50,000 $100,000 Machine hours 1,000 1,000 Setup hours 100 400 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool Instructions 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. E4.3 (LO 1, 2), AN EcoFabrics has budgeted overhead costs of $945,000. It has assigned overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 450,000 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $360,000, and $585,000 is allocated to the design cost pool. Additional information related to these pools is as follows. Machine hours Number of setups Wool 100,000 1,000 Cotton 100,000 500 Total 200,000 1,500 Instructions a. Determine the amount of overhead assigned to the wool product line and the cotton product line using activity-based costing. b. What amount of overhead would be assigned to the wool and cotton product lines using the tradi- tional approach, assuming direct labor hours were incurred evenly between the wool and cotton? How does this compare with the amount assigned using ABC in part (a)