Question 3: P5.48B

P5.48B (LO 1, 2) National Steel Company has budgeted manufacturing overhead costs of $2.5 million. It has allocated overhead on a plant-wide basis to its two products (Standard Steel and Deluxe Steel) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows: Assign overhead costs using traditional costing and ABC; compare results. Activity Estimated Centre Cost Driver Overhead Estimated Activity Material Number of $ 250,000 50,000 moves handling moves Purchase Number of 200,000 4,000 orders orders orders Product testing Number of tests 450,000 9,000 tests Machine set-up Number of set- 600,000 6,000 set-ups ups Machining Machine hours 1,000,000 100,000 machine hours Each unit of the products requires the following: Standard Steel Deluxe Steel Direct materials costs $200 $250 Direct labour costs $100 $120 Purchase orders 2 3 Machine set-up 5 10 Product testing 3 4 Machining 50 50 Material handling 5 10a. Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products. Deluxe Steel $1,620 b. Under ABC, prepare a schedule showing the calculation of the activity- based overhead rates (per cost driver). $100 per set-up c. Calculate the total manufacturing cost per unit for both products under ABC. Deluxe Steel $2,270 d. Writing Write a memo to the president of the company discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions