Assume that SunSpecs Corporation makes three types of sunglasses, Razors, Slims, and Eagles, for major retailers such as Ray-Ban and Gucci. SunSpecs presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that SunSpecs switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and estimated costs for Year 2 for each activity center.

The company estimated 10,000 labor hours would be worked in Year 2. Assume the following activities occurred in February of Year 2:

a. Compute an overhead allocation rate for each of the cost drivers recommended by the consultant and for direct labor.
b. Compute the production costs for each product for February using the cost drivers recommended by the consultant.
c. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using only direct labor hours as the allocation base and using activity-based costing. Write a brief response to management, including calculation of product costs using direct labor hours to allocateoverhead.

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Estimated Annual Costs Annual Cost Driver Units Activity Recommended Cost Driver Production Setup Order Processing Materials Handling Equipment Depreciation and Maienance Machine Hours Quality Management Packing and Shipping Number of Production Runs 60,000 100,000 40,000 120,000 100,000 Number of Units Shipped 80,000 $500,000 200 400 16,000 20,000 800 80,000 Number of Orders Pounds of Materials Used Number of Inspections Total Estimated Overhead Slims 2,000 $5,000 Eagles Razors 3,000 $8,000 400 Number of Units Produced Direct Materials Costs Direct Labor Hours Number of Production Runs... Number of Orders Pounds of Material Used Machine Hours Number of Inspections Units Shipped Direct labor costs are $20 per hour $4,000 174 12 300 800 800 20 3,000 $8,000 400 20 20 2,000 $6,000 $3,480