Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controllers staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool.

Cost Pools Costs Activity Drivers

Incoming inspection $ 158,000 Direct material cost

Production 1,500,000 Machine-hours

Machine setup 700,000 Setups

Shipping 270,000 Units shipped

The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM.

Products

308 510

Total direct material costs $ 51,000 $ 28,000

Total direct labor costs $ 169,000 $ 199,000

Total machine-hours 50,000 100,000

Total number of setups 50 90

Total pounds of material 17,100 8,100

Total direct labor-hours 5,100 8,100

Number of units produced and shipped 20,000 10,000

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant?

c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountants classification of cost pools is used?

d. If management should decide to implement an activity-based costing system, what benefits should it expect?