Pakistan Office Equipment Corporation manufactures two types of filing cabinetsPortable and VIPand applies manufacturing overhead to all units at the rate of Rs.80 per machine hour. Production information follows:

Portable

VIP

Direct-material cost

Rs.40

Rs.65

Direct-labor cost

Rs.25

Rs.25

Budgeted volume (units)

16,000

30,000

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities' three respective cost drivers, follow.

Cost Drivers

Portable

VIP

Total

Setups

100

60

160

Machine hours

32,000

45,000

77,000

Outgoing shipments

200

150

350

The firm's total overhead of Rs.6,160,000 is subdivided as follows: manufacturing setups, Rs.1,344,000; machine processing, Rs.3,696,000; and product shipping, Rs.1,120,000.

Required:

1.Compute the unit manufacturing cost of Portable and VIP filing cabinets by using the company's current overhead costing procedures.

2.Compute the unit manufacturing cost of Portable and VIP filing cabinets by using activity based costing.

3.Is the cost of the Portable filing cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?