Surfline, Inc. manufactures two types of specialty equipment, model A and Model B. Manufacturing overhead has been applied on the basis of direct labor hours. Surfline gathers some activity information and is interested in implementing an activity-based costing system. The company wants all overhead costs to be allocated to products. The overhead cost pools and activity drivers (or allocation base) are as follows:

Activity Pool	Overhead Costs	Cost Driver (or allocation base)
Machine setup	$ 36,000	# setups
Cutting/Assembly	64,000	Machine hours
Total overhead costs	$ 100,000

Total allocation base = 14,000 direct labor hours

Other product information is as follows:

	Model A	Model B
Units produced	40,000	15,000
Direct material	$10 per unit	$25 per unit
Direct labor	$8 per unit	$10 per unit
Direct labor hours	6,000	8,000
Machine setups	750	250
Machine hours	20,000	11,000

NOTE: the two products need very different # setups and machine hours.

Traditional Method, using Direct Labor Hours (DLH) as the allocation base

Determine the overhead rate per direct labor hour ___________.(TOTAL MOH costs/TOTAL allocation base)

Determine the unit product cost for each Model

	Model A	Model B
DM costs
DL costs
MOH costs
Total costs
Costs per unit

ABC Method

Activity Rates			Model A	Model B
Setup Rate =		DM costs
		DL costs
		MOH costs
Cutting rate =		Total costs
		Costs per unit

Comparison of Unit Costs

	Model A	Model B
Traditional
ABC