Lauder Company manufactures and distributes various fixtures used primarily in new building construction. At the company's Bayside plant, Lauder produces two models of one widely used fixture designated by model names LC-20 and LC-50. Currently, the Bayside plant uses direct labor-hours to allocate manufacturing overhead costs to products.

The vice presidentmanufacturing (VP-M) at Lauder has recently been considering updates to the company's costing systems as a way to ensure that managers had the best information available for decision making. However, rather than update throughout the entire firm, the VPM and CFO agreed to test an ABC system. Because of its size and focus, the Bayside plant was selected for the experiment. An ABC study team, consisting of both plant and corporate employees was formed to propose an ABC system and compare the product costs with those reported by the current system. Based on the experiment, the executives at Lauder will decide whether to roll out the new cost system to the entire company.

The study team identified four cost pools into which the manufacturing overhead costs could be grouped. There was a great deal of discussion about both the pools and the cost drivers. The final system selected consisted of the following pools and drivers. The costs were based on the forecasts for the coming year.

Cost Pools	Costs	Activity Drivers
Material inspection	$ 411,840	Direct material cost
Assembly	2,298,400	Machine-hours
Equipment setup	821,600	Production runs
Packaging and shipping	436,800	Units shipped

Data for production of the two products at the Bayside plant for the coming year of operations follows:

	Products
	LC-20	LC-50
Total direct material costs	$ 561,600	$ 187,200
Total direct labor costs	$ 436,800	$ 218,400
Total machine-hours	95,810	47,840
Total number of production runs	78	52
Number of units produced and shipped	249,600	62,400

All direct labor at the Bayside plant is paid $35 per hour.

Problem 9-63 (Algo) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6)

Required:

What unit product costs will be reported for the two products in the coming year if the current cost system continues to be used?

What unit product costs will be reported for the two products if the ABC system is used?

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?