Balin is a manufacturer makes and distributes tires for different budgets. Balin categorizes them

into three categories: Value, Comfort, Sport. Production is highly automated for the Value

model, whereas Comfort and Sport tires require increasing amounts of labour, depending on the

specific requirements for each process. Balin applies all indirect costs to production using one

predetermined overhead (OH) rate based on direct labour hours (DLH).

The estimates production came up with for the year are 27,600 DLH at a rate of $19/hour.

Assume that the following activity took place in the first month of the new year:

Value Comfort Sport

Number of units produced 18,400 7,400 2,800

Direct material costs $19,100 $12,000 $7,400

Direct labour hours 500 900 1,800

Number of orders 6 4 3

Number of production runs 2 2 3

Kilograms of material used 7,400 2,900 1,400

Machine hours 1,100 280 180

Number of inspections 3 3 3

Number of units shipped 16,600 6,900 2,300

Balin's financial team is proposing switching to an activity-based costing system and provided

the following information:

Activities Recommended Cost Drivers Estimated OH Cost Cost Drivers

Order processing Number of orders $ 55,000 100 orders

Material handling Kilograms of materials used 550,000 110,000 kilograms

Machine depreciation and

maintenance

Machine hours 378,000 18,000 hours

Quality control Number of inspections 121,000 40 inspections

Required:

A. Calculate the production costs for each product in the first month of the

upcoming year, using direct labour hours as the allocation base.

B. Calculate the production costs for each product in the first month of the

upcoming year, using activity-based costing.

C. Compare your answers in parts (a) and (b). Is the overhead charged to each

product the same under each method, why is this relevant to making production

decisions, and which one should be used?

D. Balin has a policy of pricing its tires at a rate of cost plus 40%. Based on the

above new data using activity-based costing, what can you say about Balin's

prices?