A company is considering the adoption of an activity-based costing (ABC) system because the managers suspect that their traditional costing system distorts the product costs. This company produces and sells two products Standard and Deluxe. Their traditional costing system uses machine hours (MHs) as the allocation base for manufacturing overhead cost. The production managers decided that major activities are Assembly, Machine setups, and Parts administration and determined the costs for each activity. They also identified how many MHs, setups, and parts each product requires.

Standard Deluxe

Price $120 per unit $150 per unit

Cost $32 per unit $36 per unit

$15 per unit $25 per unit

Shipping 10% of DM 25% of DM

Units produced 200,000units 100,000

units Activity Assembly (MHs) 100,000MHs 200,000

MHs Machine setups (setups) 100 setups 400setups

Parts administration (part types) 200 parts 200parts

Activities:

Cost Assembly (MHs) $1,200,000

Machine setups (setups) $600,000

Parts administration (part types) $300,000

Customer Relation $10,000

Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Standard Product?