The Bushman Company is a publicly traded corporation that produces different types of digital control systems. I have worked for this company for the last ten years in the controllers office. The company currently produces 300 products and does not anticipate any new products coming out over the next three years. I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional accounting system (where overhead costs are allocated across products at a rate of 500% of direct labor costs) when different products require different amounts of indirect resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs. Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs. Given that traditional costing systems result in significant cost distortions when determining products costs and given that the firm now has revenues of over $700,000,000 a year, Bushman has decided to adopt activity-based costing over the next year or two.

Bushmans management has hired Smithon Consulting to help us implement activity-based costing. I will be acting as the liaison between our firm and Smithon. As part of the initial implementation phase, I have asked Smithon to derive the costs associated with two of our products, drew and foise, so that these costs could be compared with the costs under our current traditional accounting system. I picked these products since Bushman management believe they have very different demands on indirect resources. Further, drew is sold in large quantities whereas foise is sold in small quantities and traditional accounting systems can cause large cost distortions in different directions for products sold in large and small quantities.

Current information from our existing system on a per unit basis is shown in Exhibit 1.

Exhibit 1

	drew	foise
Direct material	$6	$6
Direct labor hours	0.4	0.4
Direct labor wage rate per hour	$25	$25
Sales price per unit	$69.40	$97.50

My staff has identified for Smithon five cost pools. Information on those cost pools and the related allocation bases are provided in Exhibit 2.

Exhibit 2

	Total Costs	Allocation Base	Value of Allocation Base
Equipment setups	$20,400,000	Number of setups	60,000
Purchase orders	$10,150,000	number of purchase orders	145,000
Machining	$61,250,000	number of machine hours	1,750,000
Testing	$5,440,000	number of testing hours	640,000
Packaging	$10,240,000	number of containers	1,600,000

TOTAL $107,480,000

Total direct labor costs for the firm is $21,496,000

Although fixed costs are lumped in with variable costs across the five different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, machining costs will be treated as entirely fixed with respect to machine hours. Each machine is used in the production of multiple product lines.

We will assume that costs associated with equipment setups, purchase orders, testing, and packaging are variable with respect to their respective allocation bases. Currently, we believe our assumptions on cost behavior patterns are quite reasonable.

All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed. Units of product are packaged in containers and sent to distributors.

Production volumes are set equal to sales volumes since the company only produces products that they have orders for. Consequently, the firm never has a beginning work in process inventory or a beginning finished goods inventory. (Hence, the firm never has ending inventories.)

Further information on our two products are provided in Exhibit 3

Exhibit 3

	drew	foise
annual sales and production in units	135,000	3,500
number of units per batch	75	25
number of purchase orders	300	80
number of machine hours per unit	0.30	1.50
total number of testing hours	12,150	11,200
total number of containers	1,350	1,750

1a) Calculate the five activity rates (predetermined overhead rates) under activity based costing rounded to the nearest cent.

b) Determine the unit product cost of foise, and its cost components, using activity based costing. All calculations should be rounded to the nearest cent.

foise

Direct material cost per unit _______

Direct labor cost per unit _______

Equipment Setup cost per unit _______

Purchase order cost per unit _______

Machining cost per unit _______

Testing cost per unit _______

Packaging cost per unit _______

Unit product cost _______

REQUIRED: All calculations should be to two decimal points. Show Calculations