The cordless phone manufacturing division of a Denver-based consumer electronics company uses activity-based accounting. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for indirect production costs.

Activity Cost Driver

Materials handling Direct-materials cost

Engineering Engineering change notices

Power Kilowatt hours

Three types of cordless phones are produced: Senior, Basic, and Deluxe. Direct costs and cost-driver activity for each product for a recent month are as follows:

Senior Basic Deluxe

Direct-materials cost $ 25,000 $5,000 $ 125,000

Direct-labor cost $ 4,000 $1,000 $ 3,000

Kilowatt hours 50,000 200,000 150,000

Engineering change notices 13 5 2

Indirect production cost for the month was:

Materials handling $ 8,000

Engineering 20,000

Power 16,000

Total indirect production cost $ 44,000

Required:

1. Compute the indirect production cost allocated to each product with the activity-based costing system.

2. Suppose all indirect production costs had been allocated to products in proportion to their direct-labor costs. Compute the indirect production allocated to each product.

3. In which product costs, those in Requirement 1 or those in Requirement 2, do you have the most confidence? Why?