The Rubrics Corporation made four products: widgets, gadgets, smidgets, and smadgets. Exhibit 1 summarizes the direct labor, overhead, and direct material costs associated with these products. Rubrics CFO was considering implementing an activity-based costing system as a means of improving product pricing. Exhibit 2 presents the cost allocation bases for the three main overhead cost drivers (depreciation, set-up, and rent). Exhibit 3 shows the product resource requirements by cost driver. Notice, for example, that the set-up requirement for widgets is 200 hours. Among other things, the CFO wanted to compare the overhead estimates per product based on the traditional costing and ABC methods. In addition, the CFO wanted to understand, computer or calculate the following: 1.Using the traditional costing method, compute the overhead costs per product. 2.Using the traditional costing method, compute the total costs per product. 3.Under ABC:

a.Calculate the activity-based overhead rates per activity cost driver. b.For each product, compute the overhead costs per activity cost driver. c.Using the overhead costs from b., calculate the total costs per product. 4.Assuming ABC allocated overhead more accurately, which products were incorrectly priced using the traditional costing method? What difficulties might result from incorrectly budgeted products? Hint: Think about how capital resources should be allocated to the most efficient opportunities. 5.What actions might be explored to deal with the mispriced products? 6.Compare assigned costs per product under both methods. Why had activity-based costing changed the total costs assigned to each product? 7.What were two circumstances where traditional and ABC costing would likely yield similar or equal overhead costs?

Page 4 9B10B011Exhibit 1 DIRECT LABOR, OVERHEAD, AND DIRECT MATERIALS COSTS Total direct labor $1,000,000Total overhead $2,000,000Overhead rate 200% of direct laborWidgets direct labor $100,000Gadgets direct labor $300,000Smidgets direct labor $400,000Smadgets direct labor $200,000Widgets direct material $100,000Gadgets direct material $200,000Smidgets direct material $150,000Smadgets direct material $250,000Units built 1,000 of each productExhibit 2 OVERHEAD COST DRIVERS Cost allocation bases Total costs Quantity of CAB Depreciation $300,0003,000 machine hours Set-up $700,0001,000 set-up hours Rent $1,000,000100,000 square feet Exhibit 3 PRODUCT RESOURCE REQUIREMENTS BY COST DRIVER Widgets Gadgets Smidgets Smadgets 500 machine hours 900 machine hours400 machine hours1,200 machine hours200 set-up hours 300 set-up hours100 set-up hours400 set-up hours20,000 square feet 30,000 square feet10,000 square feet40,000 square fe