Contrast Activity-Based Costing and Conventional Product Costs CHECK FIGURE

(L02, L03, L04) (2b) X200 unit product Ellix Company manufactures two models of ultra-high fidelity speakers, the X200 model and the X99 cost: $213 model. Data regarding the two products follow:

Direct Annual Labor-Hours Production Total Direct per Unit (units) Labor-Hours Model X200 1.8 5,000 9,000 Model X99 0.9 30,000 27,000 36,000 Additional information about the company follows:

a. Model X200 requires S72 in direct materials per unit, and model X99 requires $50.

b. The direct labor wage rate is S10 per hour.

c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.

d. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.
Consequently, the company is considering the use of activity-based costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

Activity Activity Cost Pool Measure Machine setups Number of setups Special processing Machine-hours General factory Direct labor-hours Estimated Overhead Cost $ 360,000 180,000 1 ,260,000 $1 ,800,000 Activity Measure Model X200 Number of setups 50 Machine-hours 12,000 Direct labor-hours 9,000 Expected Activity Model X99 100 27,000 Total 150 1 2,000 36,000 Required:
1 .
Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

a. Compute the predetermined overhead rate.

b. Compute the unit product cost of each model.
2. Assume that the company decides to use activity-based costing to apply manufacturing overhead cost to products.

a. Compute the predetermined overhead rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based costing system.

b. Compute the unit product cost of each model.
3. Explain why manufacturing overhead cost shifts from Model X99 to Model X200 under activitybased costing.