Manufacturing overhead is currently assigned to the products on the basis of direct labour hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers are as follows.
| Activity Pool | Overhead Costs | Total Driver Usage |
| Setup | $256,000 | 3200 setups |
| Materials purchasing | 110,000 | 2,750 purchase orders |
| Machining/ fabricating | 136,000 | 27,200 machine hours |
| Total overhead costs | $502,000 |
Other product information is as follows:
| Classic | Premium | |
| Number of units produced | 40,000 | 10,000 |
| Direct materials cost | $15.00 per unit | $30.00 per unit |
| Direct labour cost | $5.25 per unit | $14.00 per unit |
| Direct labour hours | 30,000 | 20,000 |
| Setups | 400 | 2,800 |
| Purchase orders | 2070 | 680 |
| Machine hours | 8,000 | 19,200 |
Required:
- Using the traditional method of allocating overhead based on direct labour hours, compute the unit product cost of Classic and Premium:
- Determine the overhead rate per direct labour hour. (1 Mark)
- Allocate overhead to each product based on the direct labour hours used by each. (2 Marks) iii)Calculate the overhead cost per unit. (1 Mark) iv)Determine the unit product cost (2 Marks)
- Using the activity-based costing approach compute the unit product cost of Classic and Premium:
- Determine the three activity rates. (3 Marks)
- Allocate overhead to each product based on the activity drivers used by each. Total the three activity allocations to arrive at the total overhead allocated to each product. (2 Marks)
- Calculate the overhead cost per unit. (2 Marks) iv)Determine the unit product cost (1 Mark)
- Why do your answer in a (iv) and b (iv) differ? Be specific. (1 Mark)
