Warren Furniture produces three models of desk chairs: Basic, Ergo, and Exec. The cost system at the Warren production facility allocates overhead costs on the basis of direct labor hours. The company is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. A study team composed of the production facility's finance and operations groups has identified three overhead cost pools along with appropriate cost drivers for each pool.

Cost Pools	Costs	Activity Drivers
Assembly	$ 1,305,000	Direct labor-hours
Setup	1,077,000	Number of setups
Quality assurance	588,000	Number of tests

The plans for production for the next year and the budgeted direct costs and activity by product line are as follows:

	Products
	Basic	Ergo	Exec
Direct costs (material and labor)	$ 1,417,200	$ 1,197,000	$ 955,200
Direct labor-hours	25,200	12,000	7,800
Machine-hours	22,000	10,000	7,600
Number of setups	48	72	120
Number of tests	140	100	60
Number of units produced	7,200	3,000	1,200

Required:

Required:

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

b. What are the cost driver rates for the three cost pools identified by the study team?

d. What unit product costs will be reported for the three products if the ABC system proposed by the study team is adopted?

e. How would the activities identified by the study team be classified in terms of the levels of the cost hierarchy?

1. Assembly

2. Setup

3. Quality assurance

A.

	basic	ergo	exec
total cost
per- unit cost

B.

assembly		per direct labor- hour
setup		per setup
quality assurance		per test

D.

	basic	ergo	exec
total cost
per- unit cost

E.

Activity	hierarchy level
1. assembly
2. setups
3. quality assurance