Exercises

E$4-11$ Celia 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. Pre$-$

sented below is information related to the company's operations.

Total estimated overhead costs are $$342,000.$ Overhead cost allocated to the machining

activity cost pool is $$222,000,$ and $$120,000$ 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.