Willitte Company develops software. The market is very competitive and Willitte's competitors continue to introduce new products at low prices. Willitte offers a wide variety of different software from simple programs to extremely complex programs. Like most software companies, Willitte's raw material costs are insignificant.
The company has just hired Ralph Smythe, a recent graduate of State University's accounting program. Smythe asks Software Department Manager Patty Bujorian to join him in a pilot activity-based costing study. Smythe and Bujorian identify the following activities, related costs, and cost-allocation bases:

The company is planning to develop the following new applications:
€¢ X-Page software
€¢ X-Secure
X-Page requires 580,000 lines of code and 130 hours of testing, while X-Secure requires 8.7 million lines of code and 780 hours of testing. The company expects to produce and sell 35,000 units of X-Page and 13 units of X-Secure.
Requirements
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of X-Page and X-Secure.
3. The company's original single-allocation-base costing system allocated indirect costs to products at $134 per programmer hour. X-Page requires 10,000 programmer hours, while X-Secure requires 15,000 programmer hours. Compute the total indirect costs allocated to X-Page and X-Secure under the original system. Next, compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did.
5. What are the clues that the company's ABC system is likely to pass the cost-benefit test?

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Estimated Estimated Indirect Activity Costs Allocation Base Quantity of Allocation Base Activity Content production. leiinmg.-._..._ .- ._._._.-._._.... 3,000,000 Lines of code 10 million lines 350,000 Testing hours 2,000 testing hours S5,750,000