Sunshine, Inc. manufactures two types of birdbaths, mosaic and cement. Mosaic are the more complex of the two products, requiring more direct labor time and more machine time per unit than the concrete model. Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity-based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers are as follows:

Activity Pool Overhead Costs

Setup 256,000

Materials purchasing 110,000

Machining 136,000

Total Overhead Costs 502,000

Cement Mosaic

# of units produced 40,000 10,000

Dir materials cost $15.00 per unit $30.00 per unit

Dir labor cost $5.25 per unit $14.00 per unit

Direct labor hours 32,000 19,000

Setups 400 2,800

Purchase orders 2,070 680

Machine hours 8,000 19,200

1. Using the traditional method of allocating overhead based on direct labor hours, compute the unit product cost of mosaic and concrete birdbaths:

a) Determine the overhead rate per unit of the mosaic and concrete birdbaths.

b) Allocate overhead to each product based on the direct labor hours used by each product.

c) Determine the unit product cost.

2. Using an activity-based costing approach compute the unit product cost of the mosaic and concrete birdbaths.

3. Why do your answers in 1 and 2 differ? Which method provides a better cost per unit? Which method do you recommend to management giving the reason of why you prefer this method over the other and why the chosen method gives better results.