Digger Inc. sells a high-speed retrieval system for mining information. It provides the following information for the year.

Budgeted Actual Overhead cost $975,000 $950,000

Machine hours 50,000 45,000

Direct labor hours 100,000 92,000

(a) Compute the predetermined overhead rate.?

(b) Determine the amount of overhead applied for the year.?

(c) Explain how an activity-based costing system might differ in terms of computing a predetermined overhead rate.

Predetermined overhead rate=$19.5/machine hour

The company applied $877500 to the units produced.

Explanation:

a) Pre-determined overhead rate = Budgeted overhead manufacturing cost

Estimated number of machine hours

=975000/50000=$19.5/machine hour.

b) Applied overhead = Pre-determined overhead rate * Actual machine hours

= 19.5 * 45000

=$877500.

c.

In traditional costing we use as base for calculating overhead rate is machine hours or labor hours but in activity based costing we identify activity that consume resources, identify cost driver of each activity, compute cost rate per cost driver unit and finally assign cost to products by multiplying cost driver rate.

Predetermined overhead rate = estimated overhead/Estimated base (cost driver).