Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor hour. The company is considering adopting an activity-based costing system with the following data: 1. Compute the unit manufacturing cost of each job under the firm's current volume-based costing system. 2. Compute the unit manufacturing cost of each job under the activity-based costing system. 3. Why do the two cost systems differ in their total cost for each job? Why might these differences be important to the Company? INFORMATION PROVIDED Activity Area Materials handling Lathe work Milling Grinding Testing Cost Driver Number of parts Number of turns Number of machine hours Number of parts Number of units tested The two jobs processed in the month of June had the following characteristics: Job A Direct materials costs Direct labor costs Number of direct labor hours Number of parts Number of turns Number of machine hours Number of units in each job $10,000 $1,000 Cost Driver Rate $1.20 0.3 16 1.25 12 40 500 2. Using ABC Direct Materials Direct Labor Materials Handling Lathe Work Milling Grinding Testing Total Product Cost Unit Cost 3. Why do the two cost systems differ in their total cost for each job? Why might these differences be important to the Company? 25,000 140 15 Job B SOLUTION TEMPLATE 1. Using Volume-Based $50,000 $10,000 400 2,000 50,000 1,000 200 Method Direct Materials Direct Labor Overhead ($per DLH) Total Cost Total Units Unit cost Job A $ $ 10,000 $ 1,000 10,000 21,000 15.00 1,400 $ $ $ $ Job A $ Job B 50,000 $ 10,000 $ 100,000 $ 160,000 200.00 800 $ $ 1,000 $ 1,000 $ Job B 50,000 10,000 60,000 Total 60,000 11,000 $ 110,000 $ 181,000 $