Exercise 17-1 Wilkins Inc

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Exercise 17-1
Wilkins 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 $48,200 $114,000
Machine hours 1480 1120
Setup hours 110 440
Total estimated overhead costs are $309,500. Overhead cost allocated to the machining activity cost pool is $199,000, and $110,500 is allocated to the machine setup activity cost pool.
Instructions
(a) Compute the overhead rate using the traditional (plant-wide) approach. (% of direct labor cost)
(b) Compute the overhead rates using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.
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