Activity Based Costing (ABC) and predetermined overhead rates
Assume that SunSpecs Corporation makes three types of sunglasses, Razors, Slims, and Eagles, for major retailers such as Ray-Ban and Gucci. SunSpecs presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that SunSpecs switch to activity-based costing. Management decided to give ABC a try and identied the following activities, cost drivers, and estimated costs for Year 2 for each activity center.
The company estimated 10,000 labor hours would be worked in all of Year 2. Assume the following activities occurred in February of Year 2:
	Razors	Slims	Eagles
Number of Units Produced	3,000	2,000	1,000
Direct Materials Costs	$8,000	$5,000	$4,000
Direct Labor Hours	300	200	100
Number of Inspections	20	20	20
Units Shipped	3000	2,000	1,000
Direct labor costs are $20 per hour	$6,000	$4,000	$2,000
Requirements:
a. Compute an overhead allocation rate for each of the cost drivers recommended by the consultant and for direct labor.
b. Compute the production costs for each product for February using the cost drivers recommended by the consultant.
c. Compute the production costs for each product for February using direct labor hours as the overhead allocation base.