Exercise 9-25 Activity-Based versus Traditional Costing (L.O. 4, 5, 6)

Rodent Corporation produces two types of computer mice, wired and wireless. The wired mice are designed as low-cost, reliable input devices. The company only recently began producing the higher-quality wireless model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,154,000 based on production of 360,000 wired mice and 101,000 wireless mice. Direct labor and direct materials costs were as follows:

	Wired			Wireless			Total
Direct labor	$	1,033,000		$	381,000		$	1,414,000
Materials		750,000			691,000			1,441,000

Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:

				Activity Level
Cost Driver	Costs Assigned			Wired	Wireless	Total
Number of production runs	$	400,000		35	5	40
Quality tests performed		578,000		14	20	34
Shipping orders processed		176,000		110	50	160
Total overhead	$	1,154,000

Requirement 1:
(a)	How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? (Omit the "$" sign in your response.)

	Overhead
Wired	$
Wireless	$

(b)	What is the total cost per unit produced for each product? (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	Cost per unit
Wired	$
Wireless	$

Requirement 2:
(a)	How much overhead will be assigned to each product if direct labor cost is used to allocate overhead? (Do not round your intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

	Overhead
Wired	$
Wireless	$

(b)	What is the total cost per unit produced for each product? (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	Cost per unit
Wired	$
Wireless	$

Requirement 3:

By allocating overhead on the basis of direct labor, Rodent has been understating the cost to manufacture Wireless mice thereby overstating the profits on the Wireless model.