Quality Sound Corporation produces two types of compact discs (CDs), one is to install on touring bicycles and the other is a high-grade product for home and car use. The touring bicycles CDs are designed for durability rather than accurate sound reproduction. The company only recently began producing the high-grade disc. Management believes the accounting system may not be accurately allocating costs to products.

Management asked you to investigate the cost allocation problem. You found that manufacturing overhead is currently assigned based on the direct labor costs in the products. For your investigation, you are using data from last year. Last years manufacturing overhead was $440,000 based on production of 320,000 touring bicycle CDs and 100,000 high-grade CDs. Direct labor and direct materials costs were as follows:

a. How much of the overhead would be assigned to each product if the three cost drivers are used to allocate overhead? What would be the cost per unit (including materials, labor, and overhead) for each product if overhead is assigned to products using the three cost drivers?

b. How much of the overhead would be assigned to each product if direct labor costs had been used as the basis for allocating overhead to each product? What would be the cost per unit (including materials, labor, and overhead) for each product if overhead is allocated to products using direct labor cost as the allocation base?

Touring Bicycle $180,000 120,000 High Grade $60,000 112,000 Direct labor Materials Total $240,000 232,000 Management believes three activities cause overhead costs. The cost drivers and related costs for your analysis are as follows: Total Costs Assigned $200,000 180,000 60,000 $440,000 Cost Drivers Number of production runs Quality tests performed Shipping orders processed Total overhead Activity Level Touring High Blcycle Grade 10 12 18 100 50 50 30 150