ABC and predetermined overhead rates. Golden Time, Inc., makes three types of sunglasses: Nerds. Stars, and Fashions. Golden Time. Inc.. presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that Golden Time switch to activity-based costing. Management decided to give ABC a try, and identified the following activities, cost drivers, and estimated costs for Year 2 for each activity center.

The company estimated 10,000 labor hours would be worked in Year 2. Assume the following activities occurred in February of Year 2:

a. Compute an overhead allocation rate for each of the cost drivers recommended by the consultant and for direct labor.

b. Compute the production costs for each product for February using the cost drivers recommended by the consultant.

c. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using only direct labor hours as the allocation base and using activity-based costing. Write a brief response to management, including calculation of product costs using direct labor hours to allocate overhead.

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Estimated Activity Production Setup Order Processing Materials Handling Equipment Depreciation and Maintenance Quality Management Recommended Cost Driver Costs Cost Driver Units Number of Production Runs $ 60,000 200 Number of Orders 100.000 400 Pounds of Materials Used 40.000 16.000 Machine Hours 120.000 20.000 Number of Inspections 100.000 800 Packing and Shipping Number of Units Shipped 80.000 40.000 Total Estimated Overhead $500,000