The cordless phone manufacturing division of a consumer electronics company uses activity-based accounting. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for manufacturing overhead:

1. Compute the manufacturing overhead allocated to each product with the activity-based accounting system.
2. Suppose all manufacturing overhead costs have been allocated to products in proportion to their direct labour costs. Compute the manufacturing overhead allocated to each product.
3. In which product costs—those in requirement 1 or those in requirement 2—do you have the most confidence? Why?

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ACTIVITY Materials handling Engineering Power COST DRIVER Direct materials cost Engineering change orders Kilowatt hours Three types of cordless phones are produced: SA2, SA5, and SA9. Direct costs and cost-driver activity for each product for a recent month are SA2 SA5 Direct materials cost $25,000 (12.5%) $50,000 (25%) Direct labour cost $4,000 (50%) $1,000 (12.5%) Kilowatt hours 50,000 (12.5%) 200,000 (50%) Engineering change orders 13 (65%) 5 (25%) Manufacturing overhead for the month was Materials handling $ 8,000 Engineering 20,000 Power 16,000 Total manufacturing overhead $44,000 SA9 $125,000 (62.5%) $3,000 (37.5%) 150,000 (37.5%) 2 (10%)