Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the companys products follows.

Standard: Est. production volume, 3000 units Direct-material cost, $25 per Unit Direct Labor per unit, 3 hrs at $12 per hr Enhanced: Est. production volume, 4000 units Direct material cost, $40 per Unit Direct Labor per unit, 4 hrs at $12 per hr

Ontarios overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Orders Processed Machine Hrs Worked Inspection Hrs Standard 300 18000 2000 Enhanced 200 22000 8000 500 40000 10000

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installedmachinery that was expected to produce significant operating efficiencies. 3. Ontarios selling prices are based heavily on cost. a) by using direct-labor hrs as an application base, which product is overcosted and which product is undercosted? Calculate the amount for the cost distortion for each product. Be sure to show formulas in within the cells. b) Is it possible that overcosting and undercosting (i.e., cost distortion) and the subsequent determination of selling prices are contributing to the companys profit woes? Explain.

DATA INPUT
Anticipated overhead
Anticipated direct labor		hours
Rate
Standard
Estimated production volume		units
Direct-material cost		per unit
Direct labor per unit		hours at		per hour
Enhanced
Estimated production volume		units
Direct-material cost		per unit
Direct labor per unit		hours at		per hour
	Order	Machine	Product
	Processing	Processing	Inspection
Overhead
	Orders	Machine Hours	Inspection
	Processed	Worked	Hours
Standard
Enhanced
Total