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Demski Company has used a two - stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two

Demski Company has used a two-stage cost allocation system for many years. In the first
stage, plant overhead costs are allocated to two production departments, P1 and P2, based
on machine hours. In the second stage, Demski uses direct labor hours to assign overhead
costs from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. The budgeted and actual machine
hours for P1 are 12,000 hours. The budgeted and actual machine hours for P2 are 28,000
hours.
After attending a seminar to learn the potential benefits of adopting an activity-based costing
system (ABC), Ted Demski, the president of Demski Company, is considering implementing an
ABC system. Upon his request, the controller at Demski Company has compiled the following
information for analysis
Demski manufactures two types of products, Ace and Bex, for which the following information
available:
Cost Pool
Factory
overhead costs Activity cost driver
Expected
activity level
Machine setup $ 100,000 Setup hours 1,000
Inspection 50,000 Inspection hours 2,500
Power 50,000 Kilowatt hours 25,000
Supervision 100,000 Direct labor hours 10,000
Total overhead cost $ 300,000
Ace Bex
Units produced and sold 5,00010,000
Direct materials $ 200,000 $ 250,000
Direct labor costs $ 80,000150,000
Direct labor hours in P11,5003,000
Direct labor hours in P21,5004,000
Machine setup hours 700300
Inspection hours 1,5001,000
Power (kilowatt hours)12,50012,500
ACCT2002 Semester 2,2024 Portfolio Question
Required:
1. Determine the unit cost for each of the two products using the two-stage allocation
method. (Round calculations to 2 decimal places.)
2. Determine the unit cost for each of the two products using the proposed ABC system.
3. Compare the unit manufacturing costs for product Ace and product Bex computed in
requirements 1 and 2.
(a) Why do two the cost systems differ in their total cost for each product?
(b) Why might these differences be important to the Demski Company?

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