Problem
Sheridan 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 510 . Presented below is information related to the company's operations. \begin{tabular}{lcr|} & $\frac{\text { Standard }}{}$ & Custom \\ Direct labor costs & $\$ 50,000$ & $\$ 100,000$ \\ Machine hours & 1,200 & 1,200 \\ Number of setups & 120 & 390 \end{tabular} Total estimated overhead costs are \$306,000. Overhead cost allocated to the machining activity cost pool is $\$ 204,000$, and $\$ 102,000$ is allocated to the machine setup activity cost pool. Compute the overhead rate using the traditional (plantwide) approach information related to each product's use of cost drivers. (Round answer to O decimal places, eq 12.) Predetermined overhead rate \$of direct labor cost
Solution
Step 1 ：Given that the total estimated overhead costs are \$306,000 and the total estimated direct labor costs are \$150,000 (which is the sum of \$50,000 for standard handbags and \$100,000 for custom handbags).
Step 2 ：The traditional approach to overhead allocation uses a single plantwide overhead rate. This rate is calculated by dividing the total estimated overhead costs by the total estimated direct labor costs.
Step 3 ：Using the given values, the calculation is as follows: \(\frac{306000}{150000} = 2.04\)
Step 4 ：Final Answer: The overhead rate using the traditional (plantwide) approach is \(\boxed{2.04}\).
