Nano Corporation makes plastic and wooden picture frames. The company has assigned $137,000 in monthly manufacturing overhead costs to two cost pools as follows: $87,000 to power costs, and $50,000 to production set-up costs.

Power costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires.

(a) Allocate manufacturing overhead from the activity cost pools to each product line. (b) Compare the total per-unit cost of manufacturing plastic frames and wooden frames. (c) On a per-unit basis, which product line appears to be most profitable? (d) Citing this example, explain the merits and demerits of pre-determined overhead application rate (POHR), and Activity Based Costing (ABC).

Plastic Frames Wooden Frames Sales revenue Direct materials. Direct labor ........ Machine hours.. Production runs Units produced and sold.... $254,000 $179,000 $101,000 $38,360 $53,360 $92,720 107,420 7,580 65 35 59,000 29,000