Question

Private Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $77.00 per machine hour. Production information follows.

	No. 156						No. 157
Anticipated volume (units)		6,200						14,500
Direct material cost		$	41					$	66
Direct labor cost			30						26

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow.

	No. 156				No. 157				Total
Setups		61				41				102
Machine hours worked		15,100				25,500				40,600
Outgoing shipments		121				81				202

The firm's total overhead of $3,126,200 is subdivided as follows: manufacturing setups, $261,000; machine processing, $2,452,200; and product shipping, $413,000.

Required:

1. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
2. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
3. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
4. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156?

Answer 1