St. Lawrence Company is considering the adoption of an activity-based costing (ABC) system because the managers suspect that their traditional costing system distorts the product costs. This company produces and sells two products Generic and HiEnd. Their traditional costing system uses direct labor hours (DLHs) as the allocation base for manufacturing overhead cost. The production managers decided that major activities are Machine setups, Special Processing, and General factory and determined the costs for each activity. They also identified how many setups, MHs and DLHs for each product requires.

Product

Price

DM

DLHs/unit

Units

Total DLH

HiEnd

Generic

$ 230

$ 72.00

2.00

10,000

20,000

$ 150

$ 44.00

1.00

80,000

80,000

The wage rate per hour is: $ 20.00

The company collected the data for ABC as follow:

Activity Cost Pool

Cost Driver or Activity Measure

Estimated OH cost

Machine setup

Special processing

General factory

# of setups

Machine hours

Direct-labor hours

$ 462,000

550,000

375,000

Total

$ 1,387,000

Activity Measure

Generic

HiEnd

Total

# of setups

60

120

180

Machine hours

8,000

12,000

20,000

DLH

80,000

20,000

100,000

Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Deluxe Product?

Under the traditional costing system, the product is overcosted by $ 62.88 per unit.

Under the traditional costing system, the product is undercosted by $ 62.88 per unit

Under the traditional costing system, the product is overcosted by $ 43.56 per unit

Under the traditional costing system, the product is undercosted by $ 43.56 per unit

None of the above.