PR $5-46($Static$)$ Activity$-$Based Costing; Cost Analysis $($LO $5-1,5-2,5-4,5-5,5-7)$

$[$The following information applies to the questions displayed below.$]$

Ontario, Incorporated, 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 company's products follows.

Standard:

Estimated production volume, $3,000$ units

Direct$-$material cost, $$25$ per unit

Direct labor per unit, $3$ hours at $$12$ per hour

Enhanced:

Estimated production volume, $4,000$ units

Direct$-$material cost, $$40$ per unit

Direct labor per unit, $4$ hours at $$12$ per hour

Ontario's 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.

PR $5-46($Static$)$ Part $1$ Top management is very concerned about declining profitability...

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 installed$-$machinery that was expected to produce significant operating efficiencies.

Required:

Assuming use of direct$-$labor hours to apply overhead to production, compute the unit manufacturing costs of the Standard and

Enhanced products if the expected manufacturing volume is attained.

Assuming use of activity$-$based costing, compute the unit manufacturing costs of the Standard and Enhanced products if the

expected manufacturing volume is attained.

Ontario's selling prices are based heavily on cost$.$

a$.$ By using direct$-$labor hours as an application base, which product is overcosted and which product is undercosted? Calculate the

amount of the cost distortion for each product.

b$.$ Is it possible that overcosting and undercosting $($i$.$e$.,$ cost distortion$)$ and the subsequent determination of selling prices are

contributing to the company's profit woes?