PROBLEM 4–12 Contrasting ABC and Conventional Product cost LO4–2, LO4–3, LO4–4 Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

EX300 TX500 Total

. . . . $366,325 $162,550 $528,875

. . . . . . . $120,000 $42,500 $162,500 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below:

Required:

page 182 1. Compute the plantwide overhead rate that would be used in the company’s conventional cost system. Using the plantwide rate, compute the unit product cost for each product.

2. Compute the activity rate for each activity cost pool. Using the activity rates, compute the unit product cost for each product.

3. Why do the conventional and activity-based cost assignments differ from one another?