PROBLEM 4–17 Contrast Activity-Based Costing and Conventional Product Costing LO4–2, LO4–3, LO4–4 Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow:

page 185 Additional information about the company follows:

a. Model N 800 XL requires $75 in direct materials per unit, and Model N 500 requires $25.

b. The direct labor wage rate is $18 per hour.

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

d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment.

Consequently, the company is considering the use of activitybased costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

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 assign manufacturing overhead cost to products.

a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be assigned 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 N 500 to Model N 800 XL under activity-based costing.