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

Corbett is planning to develop the following new applications:
€¢ X-Page
€¢ X-Secure
X-Page requires 680,000 lines of code and 90 hours of testing, while X-Secure requires 10.2 million lines of code and 540 hours of testing. Corbett expects to produce and sell 20,000 units of X-Page and 8 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-based cost system allocated indirect costs to products at $113 per programmer hour. X-Page requires 8,000 programmer hours, while X-Secure requires 12,000 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-benefi t test?

Estimated Indirect Activity Estimated Quantity of Allocation Base Activity Applications development ......_. . . . .. Costs $1,800,000 2,800,000 Allocation Base New applications Lines of code 6 new applications 14 million lines leiinmg.-._..._ .- ._._._.-._._.... Total indirect costs 248000 Testing hours 1,600 testing hours $4,848,000