The current manufacturing costing system of Goran Corporation has two direct cost categories (direct materials and direct labor). Indirect manufacturing costs are applied to products using a single indirect cost pool. The indirect manufacturing cost application is number of direct labor hours; the indirect cost rate is $120 per direct labor-hour.

Goran Corporation is changing from a labor-based to a machine based manufacturing approach at its aircraft components plant. The plant manager has set up five activity areas, each with its own supervisor and budget responsibility. Pertinent data follow:

Cost Driver Used as Indirect Cost per Unit

Activity Area Cost Application Base Application Base

Materials handling Number of parts $ 0.70

Lathe work Number of turns 0.35

Milling Number of machine hours 15.00

Grinding Number of parts 0.60

Shipping Number of orders shipped 2,180.00

Information technology has advanced to the point where all the necessary data for budgeting in these five activity areas are automatically collected.

The two job orders processed under the new system at the aircraft components plant had the following characteristics:

Job Order 101 Job Order 102

Direct materials cost per job $45,300 $5,700

Direct labor cost per job $16,800 $1,400

Number of direct labor-hours per job 420 35

Number of parts per job 1,500 600

Number of turns per job 80,000 15,000

Number of machine hours per job 750 70

Number of job orders shipped 1 1

Number of units in each job order 450 20

Required

1. Compute the per-unit manufacturing cost of each job under the existing manufacturing costing system; that is, indirect costs are collected in a single cost pool with labor-hours as the application base.
2. Assume that Goran adopts an ABC system. Indirect costs are applied to products using separate indirect cost pools for each of the five activity areas (materials handling, lathe work, milling, grinding, and shipping). The application base and rate for each activity area are described in the problem. Compute the per-unit manufacturing cost of each job under the ABC approach.
3. Explain the difference between the costs of the two products under the traditional costing system and activity based costing.