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Lily 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 (machine hours) and machine setup (number of setups). The total estimated machine hours is 2,400, and the total estimated number of setups is 500. Presented below is information related to the companys operations.

		Standard		Custom
Direct labor costs		$ 50,000		$ 100,000
Machine hours		1,200		1,200
Number of setups		90		410

Total estimated overhead costs are $ 297,000. Overhead cost allocated to the machining activity cost pool is $ 192,000, and $ 105,000 is allocated to the machine setup activity cost pool.

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

Machining

$ enter a dollar amount per machine hour

Machine setup

$ enter a dollar amount per setup hour

Determine the difference in allocation between the two approaches.

Traditional costing
Standard		$ enter a dollar amount
Custom		$ enter a dollar amount
Activity-based costing
Standard		$ enter a dollar amount
Custom		$ enter a dollar amount

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