Cost distortions Ehsan Electronics Company manufactures two products, X21 and Y37, at its manufacturing plant in Duluth, Minnesota. For many years the company has used a simple plant-wide manufacturing support cost rate based on direct labor hours. A new plant accountant suggested that the company may be able to assign support costs to products more accurately by using an activity- based costing system that relies on a separate rate for each manufacturing activ¬ ity that causes support costs.

After studying the plant's manufacturing activities and costs, the plant ac¬ countant has collected the following data for 2000:

The accountant has also determined that actual manufacturing support costs in¬ curred during 2000 were as follows:

The direct materials cost for product X21 is $120 per unit, while for product Y37 it is $140 per unit.

(a) Determine the unit cost of each product using direct labor hours to allocate all manufacturing support costs.

(b) Determine the unit cost of each product using activity-based costing.

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ITEM Units produced and sold X21 Y37 50,000 100,000 Direct labor hours used 100,000 300,000 Direct labor cost $1,000,000 $4,500,000 Number of times handled 40,000 20,000 Number of parts 12,000 8,000 Number of design changes 2,000 1,000 Number of product setups 8,000 6,000