Single plantwide rate and activity-based costing

Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:

Three Representative Refrigerators	Number of Machine Hours		Number of Setups		Number of Sales Orders		Number of Units
RefrigeratorLow Volume	120		16		48		600
RefrigeratorMedium Volume	390		15		107		1,950
RefrigeratorHigh Volume	910		11		160		4,550

Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $600 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows:

	Machining Activity		Setup Activity		Sales Order Processing Activity
Activity rate	$580		$900		$200

a. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C).

If required, round all per unit answers to nearest cent. Round percents to one decimal place. For column C, use the minus sign to indicate a negative or decrease.

	Column A	Column B	Column C
Product Volume Class	Single Rate Overhead Allocation per Unit	ABC Overhead Allocation per Unit	Percent Change in Allocation
Low	$	$	%
Medium	$	$	%
High	$	$	%

b. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method?