The president of Simple Products, Inc. is attending a management seminar and has just heard about activity-based costing. He wonders whether it would help his company.

Simple Products, Inc. uses common machinery to manufacture two simple products.

Each year, there are two production runs for each product requiring similar set-up effort.

Manufacturing overhead includes set-up cost of \($50,400\) per year. Total overhead for the company including the set-up cost is \($198,000\) annually and direct labor hours are expected to total 18,000 for the year.

The following information is available for products A and B.

Required:

a. Calculate the cost per unit for each product using traditional overhead allocation.

b. Calculate the cost per unit for each product using activity-based costing.

c. Do you believe activity-based costing would benefit Simple Products, Inc.? Explain your answer.

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Units produced Direct material cost per unit Direct labor cost per unit Machine hours per unit Direct labor hours per unit Product A Product B 1,000 8,000 $14 $14 $24 $24 1 1 2 2