Pete's PCs, Inc. budgeted manufacturing overhead costs for the year are:
Type of Cost..............................Cost Pools
Electric Power..........................$2,500,000
Inspection.................................$1,500,000
Budgeted overhead costs..........$4,000,000
Under a traditional cost system, the company estimated the budgeted capacity for machine hours to be 40,000 hours. Bill is considering changing to an activity-based cost system. Thus, the following estimates were provided:
Type of Cost.....................Activity-based cost drivers
Electric power...........................50,000 kilowatt hours
Inspection......................................10,000 inspections
The following information was provided concerning the production of 1,000 units of model # 1040:
Direct materials cost.......................$50,000
Direct labor costs............................$75,000
Machine hours..................................10,000
Direct labor hours...............................5,000
Electric power - kilowatt hours........20,000
No. of inspections...............................1,000
Required:
a. What are the manufacturing costs per PC under the traditional cost system that applies manufacturing overhead costs based on machine hours?
b. What are the manufacturing costs per PC if the activity-based costing system is implemented?
c. Explain the difference between activity-based costing and conventional costing methods, and how ABC might enhance the financial reporting of Pete's PCs, Inc.