P25-3B The Software Department of Innovations, Inc., develops software for Internet appli- cations. The market is very competitive, and Innovations' competitors continue to introduce new products at low prices. Innovations offers a wide variety of different software-from simple programs that enable new users to create personal Web pages, to complex commercial (Obj. 1, 4) search engines. Like most software companies, Innovations' raw material costs are insignifi- cant. Innovations has just hired Lou Zeller, a recent graduate of State University's accounting program. Zeller asks Software Department manager Ken Guess to join him in a pilot activity- based costing study. Zeller and Guess identify the following activities, related costs, and cost allocation bases. Activity Estimated Indirect Activity Costs Allocation Base Estimated Quantity of Allocation Base Applications development... $3,000,000 Content production.. 4,800,000 New applications Lines of code Testing 315,000 Testing hours 6 new applications 15 million lines 2,100 testing hours Total indirect costs. $8,115,000 Innovations is planning to develop two new applications: MyPage-for developing personal Web pages Bullseye!-a commercial search engine MyPage requires 500,000 lines of code and 100 hours of testing, while Bullseye! requires 7.5 million lines of code and 600 hours of testing. Innovations expects to produce and sell 30,000 units of MyPage and 10 units of Bullseye! ACTIVITY-BASED 1055 COSTING AND OTHER COST MANAGEMENT TOOLS Required 1. Compute the cost allocation rate for each activity. 2. Use the activity-based cost allocation rates to compute the activity costs of MyPage and Bullseye! (Hint: First compute the total activity costs allocated to each product line, and then compute the cost per unit.) 3. Innovations original single-allocation-base cost system allocated indirect costs to prod- ucts at $100 per programmer hour. MyPage requires 10,000 programmer hours, while Bullseye! requires 20.000 programmer hours. Compute the total indirect costs allocated to MyPage and Bullseye! under the original system. Then compute the indirect cost per unit for each product. 4. Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did. 5. What are the clues that Innovations' ABC system is likely to pass the cost-benefit test?