Question

Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

Activity Cost Pool   Activity Measure   Estimated Activity   Estimated Overhead Cost
Machine Setups   Number of setups   400   $   150,000     
Quality Control   Number of inspections   1,500   $   180,000     
Other Overhead   Machine hours   30,000   $   480,000     

Information (on a per unit basis) related to three popular products at Njombe are as follows:

    Model #19   Model #36   Model #58
Direct material cost   $   400      $   540      $   310     
Direct labor cost   $   810      $   600      $   220     
Number of setups      2         3         1     
Number of inspections      1         3         1     
Number of machine hours      4         8         10     

In comparing the traditional system with the activity-based costing system, which of Njombe's Models had higher unit product costs under the traditional system?

Multiple Choice
#36 and #58
#19 and #58
#58
#19

Answer 1