• Ernest, Inc., has identified the following overhead costs and cost drivers for next year:

Overhead Item	Expected Cost	Cost Driver	Expected Quantity
Setup costs	$320,000	Number of setups	4,000
Ordering costs	120,000	Number of orders	20,000
Maintenance	480,000	Machine hours	24,000
Power	40,000	Kilowatt hours	160,000

The following are two product batches completed during the year:

	Product X	Product Z
Manufacturing costs:
Direct materials	$8,000	$19,000
Direct labour	$6,400	$12,000
Units completed	800	1,600
Direct labour hours	240	500
Number of setups	12	20
Number of orders	20	40
Machine hours	400	600
Kilowatt hours	280	400
Assets employed	$32000	$36,000
Non-manufacturing costs:
Selling expenses	$500	$1000
Administrative expenses	$400	$500

The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.)

Required:

a.	Determine the unit cost for each job using direct labour hours to apply overhead.
b.	Determine the unit cost for each job using the four cost drivers (ABC).
	Use answer in part (a) and (b):
c.	Calculate gross profit margin price for Product X and Y: Ernest desired profit for Product X is $10,000 and Product Y is $18,500.
d.	Compute return on assets price: Ernest desired return on assets for all products is 20%. And expected capital employed for Product X and Y are $32,000 and $36,000 respectively.
e.	Define activity-based costing. Explain why this approach to cost assignments is superior to the traditional method of using a traditional/plant-wide overhead cost rate. Will activity-based costing always result in lower product costs? Defend your answer.