Kensington Electronics (KE) is a wholly owned subsidiary of CWD Enterprises, a global manufacturing company. Unlike most CWD companies, KE uses a traditional costing system to compute product costs. After the last review by CWD staff, the financial management at KE decided to consider switching to activity-based costing. The controllers staff at KE has identified classified manufacturing overhead costs for the next quarter into four overhead cost pools. They also identified an appropriate cost driver for each pool.

Cost Pools	Costs	Activity Drivers
Production setup	$ 300,000	Production runs
Fabrication	551,000	Machine-hours
Certification	66,500	Certificates
Quality assurance	315,000	Test-hours

The company manufactures two basic products, which are components of navigation systems. The products are the NAV1 and NAV1-AV. Although similar, the NAV1-AV uses upgraded materials. In addition, the NAV1-AV needs to be certified for use in aircraft navigational equipment. All units produced are tested, but the tests are more extensive for the NAV1-AV model.

The following are data for production for the next quarter:

	Products
	NAV1	NAV1-AV
Total direct material costs	$ 480,000	$ 200,000
Total direct labor costs	$ 320,000	$ 100,000
Total machine-hours	10,000	4,500
Total test hours	4,000	3,000
Total number of production runs	20	20
Number of certificates	0	1
Number of units produced and shipped	4,000	1,000

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

b. What are the cost-driver rates for the four cost pools identified by the controller's staff?

d. What unit product costs will be reported for the three products if the ABC system proposed by the controller's staff is adopted?

e. How would the activities identified by the controller's staff be classified in terms of the levels of the cost hierarchy?

1 . Production setup

2. Fabrication

3. Certification

4. Quality assurance

A.

	Nav 1	Nav1- Av
Total cost
per-unit cost

B.

production setup		per run
Fabrication		per machine- hour
certification		per certificate
quality assurance		per test hour

D.

	Nav 1	Nav1- Av
total cost
per-unit cost

E.

Activity	Hierarchy Level
1 . Production setup
2. Fabrication
3. Certification
4. Quality assurance