Sharjah has become concerned about increasing competition in the market for its Standard product line. To retain its current customers, it may have to lower its price to a level that appears to be below cost. Demand for its Unique product line is very strong and SU is thinking about expanding its production capacity in that area.

Late last year Sharjah decided to investigate the benefits of implementing ABC. The company identified four significant activities related to manufacturing overhead cost. The activities, their related cost drivers (allocation bases), and the cost traced to each activity are listed below.

Total Pool

Activity Cost Driver Total Cost Activity Rate

Purchasing materials Pounds of material $ 200,000 100,000 lbs.

per unit of product

Machine setups Number of setups 800,000 400 setups

Quality inspections Hours of inspections 400,000 4,000 hours

Operating machines Machine hours 600,000 20,000 hours

Total estimated manufacturing overhead $ 2,000,000

Sharjah collected data for the month of January for each product and their respective levels of activity. Using the rates calculated above, compute the total overhead cost allocated to each product.

Standard Unique

Product Product

Actual Allocated Actual Allocated

Activity OH Cost Activity OH Cost

Purchasing materials 6,000 lbs. 4,000 lbs.

Machine setups 10 setups 30 setups

Inspections 200 hours 200 hours

Operating machines 1,500 MH 500 MH

Total MOH allocated to each product $ $

Units produced in January

MOH cost per unit

Compute total product cost and the cost per unit Compare ABC unit cost to

for each product in January using ABC to allocate unit cost computed with a

manufacturing overhead to the products. single POR.

Activity Based Costing Single MOH Allocation Rate

Standard Unique Standard Unique

Total MOH Cost

Per Unit Cost

Direct materials

Direct labor .

Manufacturing overhead _____ _____ ______ _______

Unit Product Cost $ $ $ $