EXERCISE 4-40 Outdoor Texas makes umbrellas, gazebos, and chaise lounges. The company uses a traditional overhead allocation scheme and assigns overhead to products at the rate of $30 per direct labor hour. The costs per unit for each product group in 2013 were as follows: Direct Material Direct labor Overhead TOTAL Umbrellas Gazebo Chaise Lounges $12 $120 $12 18 135 45 24 $54 180 60 $435 $117 Because profitability has been lagging and competition has been getting more intense, Outdoor Texas is considering implementing an activity-based costing system for 2014. In analyzing the 2013 data, management determined that its $12,030,000 of factory overhead could be assigned to four basic activities: quality control, setups, material handling, and equipment operation. Data for the 2013 costs associated with each of the four activities follow: Quality Control Setups Material Handling Equipment Operation Total Costs $630,000 $600,000 $1,800,000 $14,970,000 $18,000,000 Management determined that the following allocation bases and total 2013 volumes for each allocation base could have been used for ABC: Activity Quality control Material handling Setups Equipment operation Base Number of units produced Number of setups Pounds of material used Number of machine hours Volume measures for 2013 for each product and each allocation base were as follows: Umbrellas Gazebos Chaise Lounges Number of units 300,000 30,000 90,000 Number of setups 600 1,300 1,100 Pounds of material 1,200,000 3,000,000 1,800,000 Number of machine hours 600,000 1,100,000 1,300,000 a. How much direct labor time is needed to produce an umbrella, a gazebo, and a chaise lounge? b. For 2103, determine the total overhead allocated to each product group using the traditional allocation based on direct labor hours. c. For 2013, determine the total overhead that would have been allocated to each product group if activity-based costing were used. Compute the cost per unit for each product group. d. Outdoor Texas has a policy of setting sales prices based on product costs. How would the sales prices using ABC differ from those obtained using the traditional overhead allocation? a. Umbrella: Overhead per unit of umbrellas Overhead rate per hour Percent of overhead Minutes in an hour Direct labor time to produce an umbrella Gazebo: Direct labor cost per gazebo Overhead rate per hour Direct labor hours per gazebo Chaise Lounge: Direct labor cost per chaise lounge Overhead rate per hour Direct labor hours per gazebo x minutes DLHs DLHs b. Umbrellas Gazebos Chaise lounge Total C. Allocation rates: Quality control Setups Mat. handling Equip. operation Units x Overhead per Unit Cost Volume Rate per unit per setup per lb. per MH Overhead Cost allocation: Units Quality control: x x Setups: x x x Materials handling: x x x Equipment operations: Total overhead + Number of units OH cost per unit x x x Rate Umbrellas Gazebos Chaise Lounge Cost per unit: Direct materials Direct labor Overhead Total Umbrellas Gazebos Chaise Lounge