Gibson Networking develops software for internet applications. The market is very competitive, and Gibson Networking€™s competitors continue to introduce new products at low prices. Gibson Networking offers a wide variety of different software from simple programs that enables new users to create personal webpages to complex commercial search engines. Like most software companies, Gibson Networking€™s raw material costs are insignificant. Gibson Networking has just hired Nicole Merrell, a recent accounting graduate. Merrell asks Software Department Manager Jeff Gire to join her in a pilot activity-based costing study. Merrell and Gire identify the following activities, related costs, and cost allocation bases:

Gibson Networking is planning to develop the following new applications:
–  X-Page software for developing personal webpages
–  X-Secure commercial security and firewall software
X-Page requires 480,000 lines of code and 70 hours of testing, while X-Secure requires 7.2 million lines of code and 420 hours of testing. Gibson Networking expects to produce and sell 25,000 units of X-Page and 9 units of X-Secure.
Requirements
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of X-Page and X-Secure.
3. Gibson Networking€™s original single-allocation-base costing system allocated indirect costs to products at $104 per programmer hour. X-Page requires 14,000 programmer hours, while X-Secure requires 21,000 programmer hours. Compute the total indirect costs allocated to X-Page and X-Secure under the original system. Then, compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did.
5. What are the clues that Gibson Networking€™s ABC system is likely to pass the cost benefit test?

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Estimated Indirect Activity Costs Estimated Allocation Base Quantity of Allocation Base Activity Applications development Content production Testing .$1,500,000 New applications 3 new applications 2,700,000 270,000 $4,470,000 Lines of code Testing hours 9 million lines 1,500 testing hours