1. The Instyle produces only two products: Leather Bags and Leather Shoes. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 leather bags and 2,000 leather shoes in 2017. Each leather bag requires two direct labor hours to produce and each pair of shoe requires half hour to produce. Material and labour costs are given below:

Bags Shoes

Direct material cost/unit $30 $17

Direct labour cost/unit $16 $4

Budgeted (Estimated) Total Factory Overhead Data For 2017:

Activity	Budgeted Overhead Dollars	Estimated Volume Level
Production Setups	$80,000	20 setups
Material Handling	$70,000	5,000 lbs.
Packaging and Shipping	$120,000	6,000 boxes
Total Factory Overhead	$270,000

Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 2017:

Activity	Leather Bags	Leather Shoes	Overall Totals
Production Setups	5 setups	15 setups	20 setups
Material Handling	1,000 lbs.	4,000 lbs.	5,000 lbs.
Packaging and Shipping	4,000 boxes	2,000 boxes	6,000 boxes

Required:

1. Calculate the cost of each product using a direct labor hours.
2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping.
3. Cost out the two products using an activity-based costing system.