Activity-based costing Sandra Slaughter, senior vice president for sales for Showman Shoes, Inc., noticed that the company had substantially increased its market share for the high-quality boomer boots (BB) and lost market share for the lower-quality lazy loafers (LL). Sandra found that Showman's prices were lower than the competitors' for BB but higher for LL. She did not under¬ stand the reasons for these price differences because all companies used the same production technology and were equally efficient.

The manufacturing process is relatively simple. Showman's manufacturing facility has a cutting department and an assembly department. The high-qual¬ ity BB is produced in small batches (1000 pairs of shoes each) and the lower- quality LL is produced in large batches (3000 pairs each). Sandra has asked you, the company's new controller, to analyze the product costing method to see if the product prices should be changed.

The company currently uses a plant-wide cost driver rate based on direct labor hours. The rate is computed at the beginning of the year using the fol¬ lowing budgeted data:

REQUIRED

(a) Using a single, plant-wide cost driver rate based on direct labor hours, determine the costs per pair of BB and LL.

(b) Determine the costs per pair of BB and LL using departmental cost driver rates based on machine hours for the cutting department and direct labor hours for the assembly department. Allocate service department costs using the direct method.

(c) Determine the costs per pair of BB and LL using activity-based costing.

(d) Explain why unit costs for product BB are higher when departmental cost driver rates are used than when a single plant-wide rate is used.

(e) Explain why activity-based costs for product LL are lower than the corre¬ sponding costs based on a single plant-wide rate.

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Total manufacturing support costs Total direct labor hours Total machine hours Total setup hours $1,200,000 49,000 49,400 520 Your assistant has provided you with the following additional information about the production of batches of BB and LL: EACH BATCH OF (BB): 1000 PAIRS Item Direct labor hours Machine hours Setup hours Direct costs Cutting Assembly Totals 80 120 200 160 120 280 3 1 4 $7,500 $6,000 $13,500