Case Assignment

Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Cocooning Spray. Beauty Gloss is produced on an automated production line.

Overhead currently is applied to the products on the basis of direct labor hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Beauty Gloss and 40,000 units of Cocooning Spray during the current year.

Unit costs for materials and labor are:

	Cocooning Spray	Beauty Gloss
Direct material	$11	$24
Direct labor	6	12

The following items will be assessed in particular:

Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below:

	Estimated	Expected Activity
	Overhead	Cocooning	Beauty
Activity Cost Pool	Costs	Spray	Gloss	Total
Machine setups required	$204,000	800	1,600	2,400
Purchase orders issued	43,500	500	100	600
Machine-hours required	105,000	7,000	10,500	17,500
Maintenance requests issued	157,000	650	850	1,500
	$510,000

Using the data above, determine the unit product cost of each product for the current year.

What items of overhead cost make Beauty Gloss so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Beauty Gloss?