Spencer’s Sports manufactures outdoor equipment at three regional plants. The Freeway Plant produces two models of fishing reels, the Stream and the Surf. The Surf model is heavier and more durable. Overhead costs are currently allocated using direct labor cost. The plant manager has just returned from a week-long executive course where the instructor discussed product costing and, specifically, activity-based costing (ABC). The plant manager has asked the plant controller about implementing ABC at the plant. The controller has collected the following information on plant overhead for the most recent period:

The controller also collected the following information on production volume and direct costs for each product: 

Required

a. Compute the unit cost of each model under the current system.

b. Compute the unit cost of each model under the ABC system suggested by the controller’s classification of overhead costs.

c. Should the company adopt ABC for product costing?

Transcribed Image Text:

Activity Setting up. Inspecting.. Packing and shipping... Total overhead... Cost Driver Number of setups Number of inspections Number of packages shipped Cost Driver Volume Stream Surf Cost $162,000 15 121,500 36 76,500 50 $360,000 135 45 200