Questions: 1. What are the three common approaches for assigning overhead costs to products 2. What are the four hierarchical levels of activity discussed in the chapter? 3. Why is activity-based costing described as a "two-stage" costing method? 4. What are the three major ways in which activity based costing improves the accuracy of product costs? Problem: Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Direct Labor- Hours per Unit Total Direct Labor- Hours Model N 800 XL 3.0 Annual Production 3,000 units 12,000 units Model N 500 1.0 9,000 12,000 21.000 I Additional information about the company follows: a. Model N 800 XL requires $75 in direct materials per unit, and Model N 500 requires $25. b. The direct labor wage rate is $18 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products, d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Estimated Overhead Cost Activity Activity Cost Pool Measure Machine setups Number of setups Special processing Machine-hours Direct labor- General factory hours $ 360,000 165,000 1,260,000 $ 1,785,000 Expected Activity Model N 800 XL Model N 500 Total Activity Measure Number of setups Machine-hours 100 200 300 16,500 0 Direct labor-hours 16,500 21,000 9,000 12,000 Required: 1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products a. Compute the predetermined overhead rate, b. Compute the unit product cost of each model. 2. Assume that the company decides to use activity-based costing to assign manufacturing overhead cost to products. a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be assigned to each model using the activity-based costing system. b. Compute the unit product cost of each model. 3. Explain why manufacturing overhead cost shifts from Model N500 to Model N800 XL under activity-based costing