1.Spearwood Mining Machinery Manufactures two products, basic and superior and applies overhead on the basis of direct labour hours. Anticipated overhead for the upcoming accounting period is $960,000. Information about the company's products as follows:

Basic

Estimated product volume

3000 units

Direct Material Cost

$25 per unit

Direct Labour per unit

3 hours at $12 per her

Superior

Estimated product volume

4000 units

Direct Material Cost

$40 per unit

Direct Labour per unit

4 hours at $12

Spearwood Mining Machinery's overhead of $960,000 can be identified with three major activities: order processing ($18,000), machine processing ($672,000) and product inspection ($108,000). These activities are driven by number of orders processed, machine hours worked and inspection hours respectively. Data relevant to these activities follows:

Order processed

Machine Hours worked

Inspection Hours

Basic

330

19,800

2,200

Superior

220

24,200

8,800

Total

550

44,000

11,000

Required:

A)

Assuming use of direct labour hours to apply overhead to production, calculate the unit manufacturing costs of the basic and superior products, if the expected manufactuing volume is attained

3.5

b)

Assuming use of activity-based costing, calculate the unit manufacturing costs of the basic and superior products, if the expected manufacturing volume is attained

6.5

c)

Spearwood mining Machinery's selling prices are based heavily on cost.

1.Using direct labour hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for cash project

2.Is it Possible that overcosting and undercosting(i.e cost distortion) and the subsequent determinationof selling prices are contributing to the company's profit woes

2