ABC Problem 1 - Tebow

Tebow Inc. manufactures three products and it is estimated that the following activity will take place during the next production period:

Product	Total output (units)	Direct material costs per unit ($)	Machine hours per unit	Total machine hours worked
A	10,000	14	0.5	?
B	20,000	17	1.5	?
C	1,000	22	1.0	?

Indirect manufacturing overheads for the period are estimated at $360,000. Overheads are currently allocated to products using the total number of machine hours worked. The company is about to implement an activity-based costing (ABC) system and analysis of overhead has identified the following cost pools, cost drivers and product support activities:

Overhead cost pools	$	Activity-based cost drivers
Machine maintenance	153,000	Machine hours worked
Set up costs	62,100	Number of set-ups
Materials ordering	89,100	Number of materials orders
Finishing activity	21,600	Number of finishing hours
Product testing	34,200	Number of product tests
Total overhead	360,000

Product	Number of set ups	Material orders	Number of finishing hours	Number of product tests
A	3	200	120	50
B	6	1,480	100	25
C	9	300	20	75

Required:

Calculate a predetermined overhead allocation rate assuming that all manufacturing overheads are allocated using the total machine hours worked

Total estimated manufacturing overheads = Predetermined overhead rate per MH worked

Total estimated machine hours worked

Calculate the total cost per unit for each product using the traditional cost allocation rate calculated in part a) (HINT: do not forget the direct costs for each product)

Calculate the total cost per unit for each product using ABC. Clearly show all intermediate workings.

Briefly explain why the cost per unit computations calculated in parts (b) and (c) are different. Does ABC result in more accurate product costs for each of the three products?