PROBLEM 5-2 Contrasting ABC and Traditional Product Costs [L01 - CC1; L02 - CC3, 6, 7] CHECK FIGURE (3b) Regular: $202.94 per unit Siegel Corporation manufactures a product available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to capture a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Overhead is applod to products on Required: 1. Compute the predetermined overhead rate using direct labour-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. 2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea, and it came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities follow: Activity Cost Pool and Activity Measure Purchase orders (number of orders Rework requests (number of reque Product testing (number of tests) Machine related (machine-hours) Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools. 3. Assume that actual activity is as expected for the year. Using activity-based costing, do the following: a. Determine the total amount of overhead that would be applied to each model for the year. b. Compute the unit product cost for one unit of each model. 4. Can you identify a possible explanation for the company's declining profits? If so, what is it? 45 Suiui InVuuii yuno ILUUIU. Materials and labour costs follow: Deluxe Regular Direct materials cost $150 $112 per unit 14 16 Direct labour cost per hour Required: 1. Compute the predetermined overhead rate using direct labour-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. PROBLEM 5-2 Contrasting ABC and Traditional Product Costs [L01 - CC1; L02 - CC3, 6, 7] CHECK FIGURE (3b) Regular: $202.94 per unit Siegel Corporation manufactures a product available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to capture a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Overhead is applod to products on Required: 1. Compute the predetermined overhead rate using direct labour-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. 2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea, and it came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities follow: Activity Cost Pool and Activity Measure Purchase orders (number of orders Rework requests (number of reque Product testing (number of tests) Machine related (machine-hours) Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools. 3. Assume that actual activity is as expected for the year. Using activity-based costing, do the following: a. Determine the total amount of overhead that would be applied to each model for the year. b. Compute the unit product cost for one unit of each model. 4. Can you identify a possible explanation for the company's declining profits? If so, what is it? 45 Suiui InVuuii yuno ILUUIU. Materials and labour costs follow: Deluxe Regular Direct materials cost $150 $112 per unit 14 16 Direct labour cost per hour Required: 1. Compute the predetermined overhead rate using direct labour-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model