Kaui Company produces cellular phones. It has just completed an order for 80 phones placed by Many Hands, Ltd. Kaui recently shifted to an activity-based costing system, and its controller is interested in the impact that the ABC system had on the Many Hands order. Data for that order are as follows: direct materials, $36,950; purchased parts, $21,100; direct labor hours, 220; average direct labor pay rate per hour, $15.

Under Kaui’s traditional costing system, overhead costs were assigned at a rate of 270 percent of direct labor cost.

Data for activity-based costing for the Many Hands order are as follows:

Required
1. Use the traditional costing approach to compute the total cost and the product unit cost of the Many Hands order.
2. Using the cost hierarchy, identify each activity as unit level, batch level, product level, or facility level.
3. Prepare a bill of activities for the activity costs.
4. Use ABC to compute the total cost and product unit cost of the Many Hands order.
5. Manager Insight: What is the difference between the product unit cost you computed using the traditional approach and the one you computed using ABC? Does the use of ABC guarantee cost reduction for every order?

Transcribed Image Text:

Activity Cost Driver Activity Cost Rate $19 per engineering Activity Usage 32 engineering Electrical Engineering hours hour $29 per setup $26 per machine hours setups 134 machine engineering design Number of Setup Parts production Product testing setups Machine hours Number of tests Number of hour $32 per test $4.675 per package hours 52 tests Packaging 80 packages packages Machine hours 9.80 per machine 34 machine Building hour hours occupancy Assembly Direct labor $15 per direct 220 direct hours labor hour labor hours