International Steel Company has budgeted manufacturing overhead costs of $2.5 million. It has allocated over- head on a plant-wide basis to its two products (Standard Steel and Deluxe Steel) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows:

Each unit of the products requires the following:

Instructions
(a) Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products.
(b) Under ABC, prepare a schedule showing the calculation of the activity-based overhead rates (per cost driver).
(c) Calculate the total manufacturing cost per unit for both products under ABC.
(d) Write a memo to the president of the company discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions

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Estimated OverheadExpected Activity Activity Centre Material handling Purchase orders Product testing Machine set-up Machining Cost Driver Number of moves Number of orders Number of tests Number of set-ups Machine hours $250,000 $200,000 $450,000 $600,000 $1,000,000 50,000 moves 4,000 orders 9,000 tests 6,000 set-ups 100,000 machine hours Standard Steel $200 $100 Deluxe Steel $250 $120 Direct materials costs Direct labour costs Purchase orders Machine set-up Product testing Machining Materials handling 10 4 50 10 50