Part 3 Charles Jackson, the accounting manager at Big Als, has just returned from a conference on activity-based costing in Seattle and thinks Big Als should consider implementing an ABC system at the beginning of year 2. Charles has identified five primary activities taking place in the production facility at Big Als, has traced overhead costs to each activity, and has identified a cost driver for each activity as follows : ESTIMATED YEAR 2 OVERHEAD COSTS:

Activity	Monthly Overhead Cost	Cost Driver
Material delivery and handling	$4,620	Number of shipments
Assembly of pizzas	$5,670	Direct labor hours
Packaging	$1,260	Number of pizzas
Storage of materials	$3,150	Refrigerator space
Quality inspections	$2,100	Number of inspections

Big Als gets material for the veggie pizzas twice per week so the veggies can remain fresh and crisp until used in production. Veggie pizzas are also thicker, due to the height of the toppings, than a one-topping meat pizza so more refrigerator space is estimated to be needed. Big Als has also determined that meat pizzas need to be inspected more frequently for quality control due to the much higher volume of production. Charles has estimated the activity for each cost driver as follows:

	Meat Pizzas	Veggie Pizzas	Total
Number of material shipments	52	108	160
Direct labor hours	87,500	7,000	94,500
Number of pizzas	352,800	25,200	378,000
Refrigerator space (cubic feet)	2,500	500	3,000
Number of inspections	80,000	4,000	84,000

Required: A. Using the overhead activity categories identified above, classify Big Als overhead costs as unit-level, batch-level, product-level, or facility-level. B. Using the preceding activities and cost drivers, calculate a predetermined overhead rate for each activity. C. Using ABC, how much estimated overhead would be allocated to a meat pizza and a veggie pizza? D. Compare the estimated overhead allocation using ABC to the estimated overhead allocation using direct labor hours. E. What are some of the advantages and disadvantages of using ABC in this case? F. Would you suggest that Big Als adopt an ABC system? Why? G. Does the information provided by the ABC system give you some insight into areas of cost reduction? What areas have the greatest potential for cost reduction, and what are the potential impacts on the business from these cost reductions?