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Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:
Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows: Product Big Small Direct labor hours per unit 1.5 1.0 Annual production 10,000 boards 35,000 boards The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate of $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time. Patrick, the company's accountant, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. Patrick has identified the following four separate activity centres: Activity Centre Machine setup Special design Production Machining Required: Volume of annual activity Cost Driver Number of setups Design hours Traceable Costs Big Small $100,000 100 100 364,000 900 100 900,000 15,000 35,000 300,000 9,000 1,000 Direct labor hours Machine hours (a) Calculate the overhead rate on the basis of traditional overhead allocation with direct labor hours as the base. (2 marks) (b) Determine the total cost required to produce ONE unit of each product based on traditional overhead allocation. (6 marks) (c) Calculate the overhead rate for each activity centre on the basis of activity-based costing method. (2 marks) (d) Determine the total cost required to produce ONE unit of each product based on activity- based costing. (6 marks)
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