Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:

The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate of $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time. Blake Moore, the company€™s controller, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. Blake has identified the following four separate activity centers.

Required

A. Calculate the overhead rate based on traditional overhead allocation with direct labor hours as the base.

B. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated in question A.)

C. Calculate the overhead rate for each activity center based on activity-based costing techniques.

D. Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question C.

E. Explain why overhead cost shifted from the high-volume product to the low-volume product under activity-based costing.

F. Discuss the concept of cross subsidies between products as it applies in this case.

Transcribed Image Text:

Direct Labor Annual Total Direct Product Hours per Unit Production Labor Hours Big 1.5 10,000 boards 15,000 Small 1.0 35,000 boards 35,000