Saddle inc has two types of handbags

BE4-7 Spud, Inc. a manufacturer of gourmet potato chips, employs activity-based costing. The budgeted data for each of the activity cost pools is provided below for the year 2017.

Activity Cost Pools Estimated Overhead Expected Use of Cost Drivers per Activity

Ordering and receiving $84,000 12,000 orders

Food processing 480,000 60,000 machine hours

Packaging 1,760,000 440,000 labor hours

For 2017, the company had 11,000 orders and used 50,000 machine hours, and labor hours totaled 500,000. What is the total overhead applied?

BE4-12 Spin Cycle Architecture uses three activity pools to apply overhead to its projects. Each activity has a cost driver used to allocate the overhead costs to the projects. The activities and related overhead costs are as follows: initial concept formation $40,000, design $300,000, and construction oversight $100,000. The cost drivers and expected use are as follows.

Activities Cost Drivers Expected Use of Cost Drivers per Activity

Initial concept formation Number of project changes     20

Design Square feet 150,000

Construction oversight Number of months    100

(a) Compute the predetermined overhead rate for each activity.

(b) Classify each of these activities as unit-level, batch-level, product-level, or facility-level.

E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant wide 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 (plant wide) approach.

b. Compute the overhead rates using the activity-based costing approach.

c. Determine the difference in allocation between the two approaches.

E4-6 Santana Corporation manufactures snowmobiles in its Blue Mountain, Wisconsin, plant. The following costs are budgeted for the first quarter's operations.

Machine setup, indirect materials $ 4,000

Inspections 16,000

Tests 4,000

Insurance, plant 110,000

Engineering design 140,000

Depreciation, machinery 520,000

Machine setup, indirect labor 20,000

Property taxes 29,000

Oil, heating 19,000

Electricity, plant lighting 21,000

Engineering prototypes 60,000

Depreciation, plant 210,000

Electricity, machinery 36,000

Machine maintenance wages 19,000

Instructions

Classify the above costs of Santana Corporation into activity cost pools using the following: engineering, machinery, machine setup, quality control, factory utilities, and maintenance. Next, identify a cost driver that may be used to assign each cost pool to each line of snowmobiles.

E4-14 Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

Commercial Residential

Revenues $300,000 $480,000 

Direct materials costs $ 30,000 $ 50,000

Direct labor costs 100,000 300,000

Overhead costs 85,000 215,000 150,000 500,000 

Operating income (loss) $85,000 ($ 20,000)

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools Estimated Overhead Cost Drivers

Scheduling and travel $85,000 Hours of travel

Setup time  90,000 Number of setups

Supervision  60,000 Direct labor cost

Expected Use of Cost Drivers per Product

Commercial Residential

Scheduling and travel 750 500

Setup time 350 250

Instructions

a. Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.

b. Compute the operating income for each product line, using the activity-based overhead rates.

c. What do you believe Peggy Kingman should do?