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Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Fine Finishing Inc., produces a wood desk that sells for $500 and a wood table that sells for $900. Last year, total overhead costs of $6,000,000 were allocated based on direct labor costs. Direct labor costs totales $2,000,000 last year, and the company produced 15,000 desks and 5,000 tables. Total direct laborare direct materials costs by product for last year were as follows: Desk Table Direct materials $1,575,000 $950,000 Direct labor $1,200,000 $800,000 The management of Fine Finishing, Inc, would like to use activity-based costing to allocate overhess rather than one plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs. Estimated Cost Driver Activity Estimated Overhead Costs Desk Table Total Cost Driver Activity 500 Number of purchase orders Number of setups Machine hours Number of inspections 900 240 42.000 15.000 5 800,000 1,600,000 2.400,000 1.200,000 56,000,000 100 260 18,000 5,000 Purchase orders Machine setups Machine maintenance Quality inspections Total 20.000 d. Calculate the per unit profit for each product using the plantwide approach and the activity-based costing approach. How much did the per unit profit change when moving from one approach to the other? e. Refer to the estimated cost driver activity provided. Calculate the percent of each activity consumed by each product (e.g, the desk product issued 900 of the 1,000 purchase orders issued in total and therefore consumes 90 percent of this activity). These percentages represent the amount of overhead costs allocated to each product using activity-based costing. Using the plantwide approach, 60 percent of all overhead costs are allocated to the desk and 40 percent to the table. Compare the activity-based costing percentages to the percentage of overhead allocated to each product using the plantwide approach. Use this information to explain what caused the shift in overhead costs to the desk product using activity-based costing. duratin Prohlam 41 Table $190 160 480 $830 d. Traditional Costing (Direct labor costs as the allocation base); rounded to nearest dollar Desk Direct materials $105 Direct labor 80 Overhead 240 Total product cost per unit(a) $425 Sales price (b) Profit=(b)-(a) $ 75 Activity-Based Costing (Several different allocation bases); rounded to nearest dollar Desk Direct materials Direct labor Overhead Total product cost per unit (c) Sales price (d) Profit (loss) =(d) - (c) $ 70 Table SE $ 164 e. The percent calculations are as follows: Desk Table 10% Purchase orders Machine setups Machine maintenance Quality inspections 1. Activity-Based Costing Versus Traditional Approach, Activity-Based Management (continued) 4) Predetermined overhead rates are calculated for each activity as follows: Activity Purchase orders Machine up Machine maintenance Quality inspections Total m) Overhead costs are allocated below Cost Driver Number of purchase orders Number of setup Machine hours Number of inspections Estimated Overhead Costs 5 800,000 1,500,000 2,400,000 1,200,000 15,000,000 (b) Estimated Cont Driver Activity 1,000 orders 500 setups 60,000 hours 20,000 inspect (a) (b) Predetermined Overbrad Rate 5800 per order 53,200 per setup 340 per hour $60 per inspection Desk Coul Driver Activity Cost Driver Arvy Activity Purchase onders Machines Machine maintenance Quality spections Tocal overheat costs allocated Predetermined Overhead Hate SH00 per order 3.3.200 per up 313 per machine hour $10 per inspection Owhead Allocated $ 720,000 76,000 1,680,000 900.000 54,068,000 Overhead Allocated $ 30,000 12.000 720,000 100 000 51.212.00 Tocal company wide overhead costs Overhead cow per unit for each product (rounded to nearestent) 56,000,000 $211 20 338.40 . - 1. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. (Hint: Step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.) 2. Using the activity-based costing allocation method, allocate overhead to each product. (Hint: This is step 5 in the activity-based costing process.) Determine the overhead cost per unit. Round results to the nearest cent