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BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labour hours as

BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labour hours as the allocation base. Actual hours for 20x7 were 20,000. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production:

Activity

Driver

Estimated cost for 2018 Actual costs for 2017
Material Cutting # of Cuts $16,000 $13,665
Sewing machine setups # of setups 25,000 24,800
Factory maintenance # of direct labour hours 15,000 18,000
$56,000 $56,465

Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labour (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 for direct labour (30 minutes @ $8.00 per hour). In 20x8, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.

a) Calculate the cost per unit for each type of pillow under traditional costing. b) Calculate the cost per unit for each type of pillow under ABC. c) Under traditional costing, which type of pillow cross-subsidizes the other pillow? Explain.

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