Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks.

The company is currently using an absorption costing system that applies overhead based on directlabor hours. The budget for the current year ending December 31, 20x1, is as follows:

Mark Ward, Whitestone’s president, has been reading about a product-costing method called activity-
based costing. Ward is convinced that activity-based costing will cast a new light on future profits.
As a result, Brian Walters, Whitestone’s director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13.

In addition, the following information is projected for the next calendar year, 20x2.

On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.
Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.
Required:
1. Explain how activity-based costing differs from traditional product-costing methods.
2. Using activity-based costing, calculate the total cost for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities. (Hint: Refer to Exhibit 5–6, regarding calculation of the pool rate.)
3. Prepare a table showing for each product line the estimated 20x2 cost for each of the following cost elements: direct material, direct labor, machining, assembly, material handling, and inspection.
(Round to the nearest dollar.)
4. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2, using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar.)

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WHITESTONE COMPANY Budgeted Statement of Gross Margin for 20x1 JR-14 RM-13 Total Sales in units. 5,000 5,000 Sales revenue.. $1,700,000 $2,200,000 Beginning finished-goods inventory... Cost of goods manufactured and sold: Add: Direct material.. $ 240,000 $ 300,000 1,000,000 Direct labor...... 185,185 1,750,000 92,593 10,000 $3,900,000 $ 540,000 2,750,000 277,778 Applied manufacturing overhead. 544,025 272,013 816,038 Cost of goods available for sale... $1,969,210 $2,414,606 $4,383,816 Less: Ending finished-goods inventory... 240,000 Cost of goods sold.. Gross margin... *Total manufacturing overhead (applied on the basis of direct-labor hours: $1,729,210 300,000 $2,114,606 $ (29,210) $ 85,394 540,000 $3,843,816 $ 56,184 Machining... Assembly.. Material handling. Inspection... Total... $ 424,528 216,981 56,604 117,925 $ 816,038