Product Costing: Plantwide Overhead versus Activity-Based Costing Sterling Industries produces machine parts as a contract provider for a large manufacturing company. Sterling produces two particular parts, shafts and gears. The competition is keen among contract producers, and Sterling's top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to Sterling's survival. Sterling's president, Sheila Hudson, has observed that the company's current cost to produce shafts is $23.35, and the current cost to produce gears is $14.30. She indicated to the controller that she suspects some problems with the cost system because Sterling is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. She is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. She asked the controller, George Coleman, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month:

	Shafts	Gears
Production units	50,000	18,000
Selling price	$34.95	$25.50
Overhead per unit (based on direct labor hours)	$12.50	$6.25
Materials and direct labor cost per unit	$10.85	$8.05
Number of production runs	20	30
Number of purchasing and receiving orders processed	50	98
Number of machine hours	43,000	6,500
Number of direct labor hours	25,000	4,500
Number of engineering hours	2,500	2,500
Number of material moves	62	33

The controller was able to summarize the company's total manufacturing overhead into the following pools:

Setup costs	$40,000
Machine costs	198,000
Purchasing and receiving costs	218,300
Engineering costs	209,000
Materials handling costs	72,200
Total	$737,500

Required a. Calculate Sterling's current plantwide overhead rate based on direct labor hours. $Answer per direct labor hour b. Verify Sterling's calculation of overhead cost per unit of $12.50 for shafts and $6.25 for gears. Shafts: $Answer / Answer units = $12.50 per unit Gears: $Answer / Answer units = $6.25 per unit c. Calculate the manufacturing overhead cost in total and per unit for shafts and gears using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products. Note: Round your answers to two decimal places.

	Shafts	Gears
Costs in total
Costs per unit

d. Comment on Sterling's current cost system and the reason the company is facing fierce competition for shafts but little competition for gears. Sterling is Answerassigning correctlyover-assigningunder-assigning costs to shafts. Sterling is Answerassigning correctlyover-assigningunder-assigning costs to gears.