Exercise 17-1 Wilkins Inc.

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 $53,500 $116,000

Machine hours 1,430 1,470

Setup hours 100 380

Total estimated overhead costs are $298,600. Overhead cost allocated to the machining activity cost pool is $196,100, and $102,500 is allocated to the machine setup activity cost pool.

(a)Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)

Predetermined overhead rate

% 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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