Problem 4: Activity-based costing

Paris, Inc., produces two products, Product A and Product B. If currently allocates overhead costs using direct-labor hours, but the controller has recommended an activity-based costing (ABC) system using the following data:

			Activity Level
Activity	Cost-Driver Base	Cost	Product A	Product B
Production setup	Number of setups	$ 90,000	11	19
Materials handling & requisition	Number of parts per unit	$ 15,000	6	18
Packaging & shipping	Number of units shipped	$ 45,000	60,000	120,000
Total overhead		$150,000

1. Compute the amount of overhead to be allocated to each product using direct-labor hours as the allocation base. Assume that the number of direct-labor hours required to assemble each unit is 0.5 per unit for Product A and 1.0 per unit for Product B. The company produces 60,000 units of Product A and 120,000 units of Product B.

2. Compute the amount of overhead to be allocated to each product under ABC.

3. Should the company follow the controllers recommendation? Explain your answer.