Activity-based costing Bailey Company makes two products in its Northwood manufacturing plant. For many years the company has used a manufacturing overhead rate based on direct labor hours. A new plant accountant has suggested that the company may be able to assign overhead costs to products more accurately by using an activity-based costing system. The accountant explains that by creating an overhead rate for each production activity that causes overhead costs, the resulting product costs will reflect an accurate measure of overhead cost.

The manufacturing overhead rate for the year using the company's traditional overhead system is $25 per direct labor hour. After studying the plant's production activities and costs, the plant accountant provides the following activities and activity-based overhead rates:

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Number of Number of Quantity Product Produced DLH Used Direct Labor Cost Times Number of Handled Parts Design Changes Number of Setups X 50 100 $1,000 40 10 5 7 Y 100 300 3,000 20 6 3 5 Totals 400 $4,000 60 16 8 12 REQUIRED The activity-based overhead rates are as follows: Handling..... Number of parts. Design changes Setups..... $ 50 per handling 100 per part 375 per change 200 per set up The total direct materials costs were $4,250 for product X and $7,500 for product Y. a. Compute the unit costs for each product using direct labor hours as the overhead application base. b. Compute the unit costs for each product using activity-based costing. c. Discuss any differences in product costs between the two overhead costing methods. How do you explain these differences in costs? Which approach is better?