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Short Round Inc manufactures two types of hats, fedoras and baseball caps. Fedoras require 2 hours of direct labor per unit to manufacture fedoras compared

Short Round Inc manufactures two types of hats, fedoras and baseball caps. Fedoras require 2 hours of direct labor per unit to manufacture fedoras compared to 1 hour of direct labor per unit to produce baseball caps. Overhead is currently allocated to the two products on the basis of direct labor hours. Short Round estimated it would incur $510,000 in manufacturing overhead costs, and produce 10,000 units of fedoras and 40,000 units of baseball caps during the current year.

Unit costs for direct materials and direct labor are as follows:

Baseball Caps

Fedoras

Direct materials per unit

$11

$24

Direct labor per unit

$6

$12

  1. What is the unit product cost of each product under the current overhead allocation method?

  1. Short Round is considering the use of activity-based costing as an alternative to its current overhead allocation method. Data relating to the companys activity cost pools for the current year are given below:

Expected Activity Levels

Estimated OH costs

Baseball Caps

Fedoras

Total

Machine setups

$204,000

800

1,600

2,400

Purchase orders

$43,500

500

100

600

Machine-hours

$105,000

7,000

10,500

17,500

Maintenance requests

$157,500

650

850

1,500

Using the data above, what is the revised unit product cost of each product under the activity-based costing system?

  1. Compare your answers to parts a and b. What overhead activities seem to contribute to the differences you observe?

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