PROBLEM 7A-4 Activity-Based Costing as an Alternative to Traditional Product Costing ILO6 For many years, Sinclair Graphic Design has provided design and digital printing services for indoor banners. The nylon banners, which come in a standard size, are used for a variety of purposes, including trade shows, sporting events, and other promotional activities. Three years ago, the company introduced a second printing and production service for outdoor banners that have become increasingly popular. The outdoor banners are a more complex product than the indoor banners, requiring weatherproof vinyl materials and a different printing pro- cess to improve the visibility of the text and graphics content. Moreover, outdoor banners are printed in smaller production runs because of less frequent orders; the setup of the printing equipment takes longer; and, since higher durability is needed to withstand the elements, more quality inspections are needed. Under the traditional costing approach, overhead costs are assigned to the products on the basis of direct labour-hours. Despite the introduction of the new outdoor banners, profits have declined steadily over the past three years. Management is beginning to believe that the company's costing system may be at fault. Unit costs for materials and labour for the two products follow: Indoor Banners Outdoor Banners Direct materials... Direct labour ($20 per hour)... $ 9 $20 $26 $60 Management estimates that the company will incur $600,000 in overhead costs during the cur- rent year and that 10,000 indoor banners and 2,000 outdoor banners will be produced and sold. Chapter 7 Activity-Based Costing: A Tool to Aid Decision Making 30 Required: 1. Compute the predetermined overhead rate assuming that the company continues to apply overhead cost to products on the basis of direct labour-hours. Using this rate and other data from the problem, determine the unit product cost of each product. 2. Management is considering using ABC to apply overhead cost to products for external financial reports. Some preliminary work has been done, and the data that have been col- lected are displayed below. Using these data, calculate the predetermined overhead rate for each activity cost pool identified below: Activity Measures Estimated Total Overhead Costs Indoor Banners Outdoor Banners Total Order processing (orders received). Print setup (number of batches). Artwork and graphic design (labour hours) Quality control (number of inspections) Total overhead cost.. $150,000 50,000 350,000 50,000 600,000 500 800 7.000 400 500 200 7,000 400 1,000 1000 14,000 800 a. 3. Using the predetermined manufacturing overhead rates that you computed in (2) above, do the following Determine the total amount of manufacturing overhead cost that would be applied to each product using the ABC system. After you have computed these totals, determine the amount of overhead cost per unit of each product. Compute the unit product cost of each product. 4. Based on your calculations in (1) through (3) above, in terms of overhead cost, what factors make the outdoor banners more costly to produce than the indoor banners? Are the out- door banners as profitable as the company thinks they are? Explain. b