Saddle 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 and machine setup. Presented below is information related to the company’s operations. Standard Custom
Direct labor costs $50,000 $100,000
Machine hours 1,200 1,200
Setup hours 120 420

Total estimated overhead costs are $305,400. Overhead cost allocated to the machining activity cost pool is $192,000, and $113,400 is allocated to the machine setup activity cost pool.

Required:
a. Compute the overhead rates using the activity-based costing approach.
b. Compute the overhead rates using the activity-based costing approach.
c. Determine the difference between the two approaches.