Fargo Corp. produces and sells three different models of womens boots-Economy, Quality, and Fancy. The company currently uses a traditional absorption costing system to allocate manufacturing overhead costs to product lines. This traditional costing system allocates manufacturing overhead cost on the basis of each products direct labor hours. But the companys CEO, Sharon, recently heard about Activity Based Costing (ABC), and shes considering ABC implementation at Fargo Corp.

Sharon collected the following product data for the year just ended:

	Economy	Quality	Fancy
Pairs produced and sold	7,000	4,000	2,000
Direct labor hours used in production	14,000	10,000	6,000
Direct labor cost used in production	$210,000	$150,000	$90,000
Machine Hours used	21,700	12,800	7,000
Number of kilowatt hours used by factory during production	44,800	33,000	20,400
Number of production setups	2	8	9
Number of Employees	9	6	5

The companys CFO computed actual manufacturing overhead costs for the year just ended, by overhead activity, as:

Activity	Activity Costs
Machining	$320,000
Utilities	$530,000
Setups	$340,000
Supervision	$610,000
Total Manufacturing Overhead Cost	$1,800,000

The direct materials cost for the year just ended for pairs of Economy boots was $20, for pairs of Quality boots was $25, and for pairs of Fancy boots was $35.

Required:

For the year just ended, (a)allocate manufacturing overhead costs to each product line and (b)compute a total manufacturing cost per pair of boots for each product line using the traditional absorption costing approach based on direct labor hours.

Assume that the cost driver used for the machining activity cost pool is the number of machine hours used, for the Utilities activity cost pool is the number of kilowatt hours used by the factory, for the Setups activity cost pool is the number of production setups, and for the Supervision activity cost pool is the number of employees. (a)Allocate manufacturing overhead costs for the year just ended to each product line and (b)compute a total manufacturing cost per unit for each product line using Activity Based Costing.

Which of the two methods from questions 1 and 2 is better for decision management? Thoroughly explain why that method is better for decision management.

Suppose Fargo has been pricing its products for sale using a simplistic pricing rule of adding a 30% markup to its computed product cost. (a)Compute the per pair selling prices for each product line on the basis of that product lines per pair product cost, as computed in each of questions 1 and 2, for the year just ended. (b)Discuss the differences in selling prices between products and across product costing methods.

In what ways might the use of traditional absorption costing and Fargos current selling prices (as based on traditional absorption costing per pair product costs) have hurt Fargos profitability for the year just ended?

Which method for allocating manufacturing overhead costs to products, a traditional absorption costing (like in question 1) approach based on direct hours or an ABC approach (like in question 2), is better for decision control purposes? Thoroughly explain why.