Wayfarer Corporation is contemplating changing its cost system to an activity-ba

Question

Wayfarer Corporation is contemplating changing its cost system to an activity-based costing system and wants to know more about the effects of doing so. The corporation’s cost accountant has identified three overhead cost pools along with the cost drivers associated with each pool as follows:

The corporation makes three models of kitchen sinks (Deluxe, Premium, and Standard). The plans for production for the next year and the direct costs that have been budgeted for activity by product are listed below:

A. The current cost accounting system charges overhead to products on the basis of direct labor-hours. What unit product costs will be reported for the three products assuming the current cost system continues to be used?

B. What are the cost driver rates associated with the three cost pools specified by the cost accountant?

C. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant’s categorization of cost pools is utilized?

Cost Pools Cost Activity Drivers Utilities $5,420,000 180,000 machine hours Delivery 5,420,000 10,000 deliveries Assembly 10,940,000 2,000,000 pounds of materials

Explanation / Answer

A)Total overhead : 5420000+5420000+20940000=21780000

Total direct labor hours: 12400+8500+18600=39500

Overhead rate per hour : 21780000/39500=$ 551.39

B)

c)

Deluxe Premium standard Direct cost 850000 850000 850000 overhead cost 12400*551.39= 6837236 8500*551.39=4686815 18600*551.39 = 10255854 Total 7687236 5536815 11105854 Number of units 18000 12000 24000 cost per unit $ 427.07 461.40 462.74

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