Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sun-shield presently allocates overhead to products using a rate based on direct labor-hours. A consultant recommended that Sunshield switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver.

Activity Recommended Cost Driver Costs Cost Driver Units

Production setup Production runs $ 30,000 100

Order processing Orders 50,000 200

Materials handling Pounds of materials used 20,000 8,000

Equipment depreciation and maintenance Machine-hours 60,000 10,000

Quality management Inspections 50,000 40

Packing and shipping Units shipped 40,000 20,000

Total overhead $250,000

In addition, there are 2,500 direct labor-hours in a typical year.Assume the following activities occurred in February of 2019:

Nerds Stars Fashions

Units produced 1,000 500 400

Direct materials costs $4,000 $2,500 $2,000

Direct labor-hours 100 100 89

Orders 8 8 4

Production runs 2 4 8

Pounds of material 400 200 200

Machine-hours 500 300 300

Inspections 2 2 2

Units shipped 1,000 500 300

Direct labor costs are $15 per hour.

a .Compute an overhead allocation rate (1) for each of the cost drivers recommended by the consultant and (2) for direct labor.

b. Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor-hours as the allocation base. (Note: Production costs are direct materials, direct labor, and overhead.)

c. To derive product costs under ABC, compute the production costs for each product for February using the cost drivers recommended by the consultant.

d. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using direct labor-hours as the allocation base and using activity-based costing. Write a brief response to management.