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 $60,000 $103,000 Machine hours 1,400 1,290 Setup hours 96 400 Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $195,000, and $105,000 is allocated to the machine setup activity cost pool. Compute the overhead rate using the traditional (plantwide) approach.

Estimated manufacturing overhead rate= $1.84 per direct labor dollar

Explanation:

Giving the following information:

Total Direct labor costs= 60,000 + 103,000= $163,000

Total estimated overhead costs are $300,000.

To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 300,000/163,000

Estimated manufacturing overhead rate= $1.84 per direct labor dollar

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