Activity-based costing) Outdoor Living makes umbrellas, gazebos, and lawn chairs. The company uses a traditional overhead allocation scheme and as¬ signs overhead to products at the rate of $20 per direct labor hour. In 2006, the company produced 200,000 umbrellas, 20,000 gazebos, and 60,000 lawn chairs and incurred $8,000,000 of manufacturing overhead costs. The cost per unit for each product group in 2006 was as follows:

Management determined that the following allocation bases and total 2006 volumes for each allocation base could have been used for ABC:

a. For 2006, determine the total overhead allocated to each product group using the traditional allocation based on direct labor hours.

b. For 2006, determine the total overhead that would have been allocated to each product group if activity-based costing were used. Compute the cost per unit for each product group.

c. Outdoor Living has a policy of setting sales prices based on product costs. Flow would the sales prices using activity-based costing differ from those obtained using the traditional overhead allocation?LO1.

Transcribed Image Text:

Umbrellas Gazebos Direct material Direct labor Overhead $ 8 $ 80 12 90 Total 16 $36 120 $290 Lawn Chairs $ 8 30 40 $78 Because profitability has been lagging and competition has been getting more intense, Outdoor Living is considering implementing an activity-based costing system for 2007. In analyzing the 2006 data, management determined that all $8,000,000 of factory overhead could be assigned to four basic activities: quality control, setups, material handling, and equipment operation. Data from 2006 on the costs associated with each of the four activities follows: Quality Control $400,000 Setups $400,000 Material Handling $1,200,000 Equipment Operation Total Costs $6,000,000 $8,000,000