Sawyer Internet develops software for internet applications. The market is very competitive, and Sawyer Internet's competitors continue to introduce new products at low prices. Sawyer Internet offers a wide variety of softwarefrom simple programs that enable new users to create personal webpages to complex commercial search engines. Like most software companies, Sawyer Internet's raw material costs are insignificant Sawyer Internet has just hired Nicole Merrell, a recent university graduate in accounting. Merrell asks Software Department Manager Jeff Gire to join her in a pilot activity based costing study. Merrell and Gire identify the following activities, related costs, and cost-allocation bases: E (Click the icon to view the information.) Requirements Estimated Estimated Indirect Allocation Quantity of Activity Costs Base Allocation Base Activity Applications development Content production $ 1,500,000 New applications 5 new applications 3,000,000 Lines of code 12 million lines 408,000 Testing hours 2,400 testing hours 4,908,000 Testing .. $ Total indirect costs.. Sawyer Internet is planning to develop the following new applications: X-Page-software developing personal webpages X-Secure-commercial security and firewall software X-Page requires 520,000 lines of code and 160 hours of testing, while X-Secure requires 7.8 million lines of code and 960 hours of testing. Sawyer Internet expects to produce and sell 55,000 units of X-Page and 10 units of X-Secure. Requirement 1. Compute the cost allocation rate for each activity. Determine the formula, then compute the cost allocation rate for each activity. (Round your answers to the nearest cent.) Activity overhead rate Appl. Dev. I application Content prod. / line Testing 7 hour Requirement 2. Use the activity based cost allocation rates to compute the indirect cost of each unit of X-Page and X-Secure. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.) (Round the cost per unit to the nearest cent.) X-Page Applications development Content production Testing Total costs Number of units Per unit cost X-Secure First, compute the total indirect costs allocated to X-Page and X-Secure under the original single-allocation-base system. Select the formula, then enter the amounts and calculate the indirect cost allocated. Indirect cost Product X = allocated X-Page X-Secure II Now compute the indirect cost per unit for each product under the original single-allocation-base system. Begin with X-Page, then compute X-Secure. (Round the cost per unit to the nearest cent.) X-Page Total indirect costs allocated / Number of units Per unit cost X-Secure Requirement 4. Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did. The original system X-Page and X-Secure. Click to select your overcosted lick Check Answer. undercosted The original system allocated overhead to X-Secure than to X-Page. But X-Secure required times as many lines of code and times as much testing as X-Page. The ABC system this difference and allocates of the content production and testing costs to X-Secure. Requirement 5. What are the clues that Sawyer Internet's ABC system is likely to pass the cost-benefit test? Sawyer Internet's different software applications use Sawyer Internet has costs. Sawyer Internet produces Sawyer Internet is in Sawyer Internet has
