Saddleback Farms Inc. is a small agriculture-based company located on Nevis, one of the twin islands of the St. Kitts Nevis Federation. It utilizes ten (10) acres of land for growing coconuts, mangoes, avocados, various cash crops, and bushes for the manufacture of various teas for the local and regional markets. The owner/manager, Mr. Sylvester Livingstone and ten employees operate the farm. Mr. Livingstone believes that the pricing of products is flawed and engaged your firm to advise on any improvements he should make. Your firm assigned you to the task and after touring the Farm and holding discussions with key personnel, you discovered that the company uses a single rate based on direct labor hours to allocate overhead to product instead of activity-based costing.

Required: Write a letter to Mr. Livingstone discussing the pros and cons of single rate and activity-based costing to allocate overhead. Be sure to define terms and distinguish between the two approaches and then discuss the pros and cons for each. Conclude with making a recommendation on which approach the company should adopt.