$1\mathrm{.}2(12$ marks$)$ Activity Based Costing $$ Chapter $7$

The ACME printing company prints limited edition sports books with production runs of $15,000$ to $100,000.$ It has recently adopted an activity$-$based costing $($ABC$)$ system to assign manufacturing overhead to products. The following data relate to one, product $($book$),$ Sport Legends, and the ABC cost pools:

Sports Legends:

Annual production $40,000$ units

Direct materials per unit $$37$

Direct labour per unit $$8$

Manufacturing overhead cost pools:

Cost Pool Cost Cost Driver

Materials ordering $$80,000$ Number of purchase orders

Materials inspection $525,000$ Number of receiving reports

Equipment inspection $2,500,000$ Number of setups

Quality control $1,000,000$ Number of inspections

Other $25,000,000$ Direct labour cost

Total manufacturing overhead $$29,865,000$

Annual activity information related to cost drivers:

Cost Pool All Books Sport Legends

Materials ordering $120,000$ orders $1,200$

Materials inspection $2,100$ receiving reports $315$

Equipment setup $125$ setups $1$

Quality control $5,000$ inspections $500$

Other $$12,500,000$ direct labour $$320,000$

Required:

a$)$ Calculate the overhead rate per unit of activity for each of the five costs pools?

b$)$ Calculate the total overhead assigned to the production of the Sport Legends book. Round to two decimal places.

c$)$ Calculate the overhead cost per unit for the Sport Legends book.

d$)$ Calculate the total unit cost for the Sport Legends book.

e$)$ Suppose the ACME printing company allocated overhead by a traditional volume$-$based method using direct labour hours as the allocation base. Determine:

i$.$ The overhead rate per direct labour hour.

ii$.$ The per unit overhead assigned to the Sport Legends book.

iii. Discuss the difference in cost allocation between the traditional method and the activity$-$based costing approach.