EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product S. Product W is the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to a half-hour of direct labour time for Product S. Product W is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct labour hours. The company estimated it would incur $500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labour are:

Product S Product W

Direct Materials $10 $ 24

Direct Labour $ 8 $ 12

Required:

a) Compute the predetermined overhead rate under the current (traditional) method of allocation, and determine the unit product cost of each product for the current year.

b) The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

Estimated Overhead Expected Activity

Activity Cost Pools Cost S W Total

Machine Setups Required $ 200000 800 1200 2000

Purchase Orders Issued 43500 500 100 600

Machine Hours Required 104000 3000 10000 13000

Maintainance Request Issued 152500 860 1140 2000

$ 500000

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

c) What product is being under/over costed in the Traditional method?