International Stone produces two types of engineered stone - Stone A and Stone B. It expects to produce 500 tons of stone A and 4,000 tons of stone B in the upcoming year and has budgeted manufacturing overhead costs of $1,890,000. It has always allocated manufacturing overhead to all its products using machine hours, which are estimated to be 180,000 machine hours for the current year.

The CEO has provided you with the following comment: Our competition is producing Stone B at $275 per ton. From the looks of it our manufacturing costs are higher than that. How can we compete? Do you think production of stone B should be discontinued? That means we will have to close part of the factory and lay off 100 workers.

You decide you will experiment with activity-based costing. After some digging you create five activity pools and related activity cost drivers as follows.

	Stone A	Stone B
Tons of stone produced	500 tons	4,000 tons
Direct materials cost	$300,000	$400,000
Direct labour costs	$120,000	$120,000

Activity Pools	Cost Driver	Estimated Overhead	Estimated Total Activity
Purchase orders	# orders	$100,000	2,000 orders
Machine sets ups	# set-ups	$320,000	10,000 set ups
Product testing	# tests	$420,000	7,000 tests
Machining	# machine hours	$810,000	180,000 machine hours
Material handling	# moves	$240,000	600 moves

Each of the products require the following:

	Stone A 500 tons	Stone B 4,000 tons
Purchase orders	1,900	100
Machine set-ups	9,500	500
Product testing	6,000	1,000
Machine hours	100,000	80,000
Moves - Material handling	490	110

1. Under the traditional product costing using machine hours, calculate the manufacturing cost in total and per ton (unit) for both products (round to the nearest cent).

2. Under ABC,

2. 1. prepare a schedule showing the calculation of the activity -based overhead rates per cost driver.
   2. calculate the manufacturing costs in total and per ton (unit) for both products (round to the nearest cent).
3. Compare the results of the two MOH allocation methods using the following grid. How would you respond to the CEO?

	Stone A	Stone B
Unit cost - Traditional
Unit cost - ABC