Ortega Sporting Goods, Inc., produces indoor treadmills. The company allocates its overhead costs using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow.

Producing 5,000 units of PFT200, one of the company’s five products, took 4,000 labor hours, 25 setups, and consumed 30 percent of the product-sustaining activities.

a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the 5,000 units of PFT200?
b. How much overhead is allocated to the 5,000 PFT200 units using activity-based costing?
c. Compute the overhead cost per unit for PFT200 using activity-based costing and direct labor hours if 5,000 units are produced. If direct product costs are $120 and PFT200 is priced at 20 percent above cost (rounded to two decimal points), compute the product’s selling price under each allocation system.
d. Assuming that activity-based costing provides a more accurate estimate of cost, indicate whether PFT200 would be over- or underpriced if Ortega uses direct labor hours as the allocation base. Explain how over- or undercosting can affect Ortega’s profitability.
e. Comment on the validity of using the allocated facility-level costs in the pricing decision. Should other costs be considered in a cost-plus pricing decision? If so, which ones? What costs would you include if you were trying to decide whether to accept a specialorder?

  • CreatedFebruary 07, 2014
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