You're in Hot Water Inc. manufactures Jacuzzi hot tubs.The company produces two models, the "Basic" and the "Superjet" which promises a jet power setting that "borders on cruel".Since the introduction of the Superjet, the company's profits have been faltering, despite increased sales.The company's senior accountant believes that the costing system may be causing problems.The company uses direct-labour hours as the basis for applying overhead.Overhead is estimated to be $300,000.

The following cost data is known:

Basic

Superjet

Direct Materials

$700

$1200

Direct Labour ($15 per hour)

60

90

Number of units produced

600 units

100 units

The CFO wishes to explore an activity-based costing system.

Activity (Cost Driver)

Estimated MOH

Expected Activity

Total

Basic

Superjet

Assembly (Labour Hours)

$60,000

3,000

2,400

600

Quality control (Inspection Hours)

75,000

800

600

200

Machining (Machine Hours)

25,000

40,000

30,000

10,000

Parts Admin (Number of Parts)

140,000

500

100

400

$300,000

Required:

a)Under the traditional costing method:

i.Compute the predetermined overhead rate.

ii.Determine the unit cost of each product.

b)Under activity-based costing:

i.Compute the activity rates for each activity.

ii.Determine the expected unit cost of each product.

c)Compare and comment on your answers from parts a.) and b.) above.

d)If ABC produces more accurate cost data, why is it not more widely used?