Wilkins Inc. Has Two Types Of Handbags: Standard And Custom
Wilkins Inc Has Two Types Of Handbags Standard And Custom The Contr
Wilkins Inc. has two types of handbags: standard and custom. The company’s overhead allocation is currently based on a plantwide rate derived from direct labor costs. The management is considering transitioning to activity-based costing (ABC) to potentially achieve more accurate overhead cost allocations. To evaluate this, it is essential first to calculate the traditional overhead rate based on direct labor costs and then compare it with ABC allocations.
The provided data include direct labor costs, machine hours, setup hours, and overhead costs associated with two activity cost pools: machining and machine setup. Specifically, data points are as follows:
- Direct labor costs are $49,700 for standard handbags and $117,000 for custom handbags.
- The total estimated overhead costs amount to $297,300.
- Overhead allocated to the machining activity is $196,800.
- Overhead allocated to machine setup is $100,500.
- Machine hours and setup hours are also given but are less relevant to the plantwide rate calculation based on direct labor.
The goal is to compute the plantwide overhead rate, which is typically expressed as a percentage of direct labor costs. This involves dividing the total estimated overhead by the total direct labor costs, then converting that ratio into a percentage.
Step 1: Calculate Total Direct Labor Costs
Total direct labor costs are the sum of costs for standard and custom handbags:
\[
\text{Total direct labor costs} = \$49,700 + \$117,000 = \$166,700
\]
Step 2: Calculate the Predetermined Overhead Rate
Using the total estimated overhead costs:
\[
\text{Overhead rate} = \left( \frac{\text{Total estimated overhead costs}}{\text{Total direct labor costs}} \right) \times 100
\]
\[
\text{Overhead rate} = \left( \frac{\$297,300}{\$166,700} \right) \times 100 \approx 1.784 \times 100 = 178.41\%
\]
Therefore, the plantwide overhead rate based on direct labor costs is approximately 178.41%.
Summary
The traditional overhead rate for Wilkins Inc., based on direct labor costs, is 178.41% of direct labor costs. This rate means that for every dollar of direct labor costs incurred, $1.78 is allocated for manufacturing overhead using the plantwide approach.
Understanding this rate is essential for cost management and pricing strategies. However, as the president suggests, transitioning to activity-based costing could provide more precise insights into overhead costs associated with each product type, ultimately aiding in better cost control and profitability analysis.
References
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