Astro Corporation, a furniture manufacture, uses an activity-based costing system. It has identified the following selected activities:

Setting up machines for a particular batch of production.

Inspecting wood prior to using it in production.

Packaging completed furniture in boxes for shipment.

Inspecting completed furniture for quality control.

Purchasing TV time to advertise a particular product.

Incurring property taxes on factory buildings.

Incurring paint cost for furniture produced.

Classify each activity as a unit-level, batch-level, product level, or facility level activity.

Identify an appropriate cost driver (allocation base) for each of the activities.

Fenya Industries produces two surge protectors: K2761 with six outlets and D3354 with eight outlets and two telephone line connections. Because of these product differences, the company plans to use activity base costing to allocate overhead cost. The company has identified four activity pools. Relevant information follows.

Activity pools Cost Pool Total Cost Driver

Machine setup $144,000 # of setups

Machine operation $360,000 # of machine hours

Quality control $57,600 # of inspections

Packaging $38, 400 # of units

Total overhead cost $600,000

Expected activity for each product follows.

# of setups # of machine hours # of inspections # of units

K2761 48 1,400 78 25,000

D3354 72 2,600 172 15,000

Total 120 4,000 250 40.000

Compute the overhead rate for each activity pool.

Determine the overhead cost allocated to each product.

Using this information :

Activity pools Cost Pool Total Cost Driver

Machine setup $144,000 # of setups

Machine operation $360,000 # of machine hours

Quality control $57,600 # of inspections

Packaging $38, 400 # of units

Total overhead cost $600,000

# of setups # of machine hours # of inspections # of units

K2761 48 1,400 78 25,000

D3354 72 2,600 172 15,000

Total 120 4,000 250 40.000

Assume that before shifting to activity- based costing. Fenya Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two surge protectors follow.

Direct Labor Hours

K2761 32,000

D3354 18,000

Total 50,000

Compute the amount of overhead cost allocated to each type of surge protector when using direct labor hours as the allocation base.

Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Explain why the per unit overhead cost is lower for the higher-volume product when using ABC.