Question - Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour 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 set-up. Presented below is information related to the company's operations.

Standard Custom

Direct labour costs $51,700 $103,800

Machine hours $650 $1,300

Set-up hours $130 $520

Total estimated overhead costs are $287,675. The overhead cost allocated to the machining activity cost pool is $230,100, and $57,575 is allocated to the machine set-up activity cost pool.

Calculate the overhead rate using the traditional (plant-wide) approach.

Calculate the overhead rate using the activity-based costing approach.

Determine the difference in allocation between the two approaches.