For many years, Barkov Company manufactured a single product called a mono-relay. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product, called a bi-relay, which has become increasingly popular. The bi-relay is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The mono-relay requires only 0.75 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products based on direct labor-hours.

Despite the growing popularity of the companys new bi-relay, profits have been declining steadily. Management is beginning to believe that there may be a problem with the companys costing system. Material and labor costs per unit are as follows:

Direct materials. Mono-Relay Bi-Relay

Direct labor (0.75 hour and 1.0 hour @ $12 per hour) $35 $48

$9 $12

Management estimates that the company will incur $1,000,000 in manufacturing overhead costs during the current year and 40,000 units of the mono-relay and 10,000 units of the bi-relay will be produced and sold.

Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following four activity cost pools.

Estimated Mono- Bi-

Activity Cost (and Activity Measure) Cost Total Relay Relay

Maintaining parts inventory (number of part types) $ 180,000 225 75 150

Processing purchase orders (number of orders) 90,000 1,000 800 200

Quality control (number of tests) 230,000 5,750 2,500 3,250

Machine-related (machine-hours) 500,000 10,000 4,000 6,000

Total overhead cost $1,000,000

Required:

Determine the unit product cost for each product using the current system.

Determine the unit product cost for each product using the activity-based costing system.

In view of the outcomes for the two costing systems, explain which costing system would be more appropriate.