Activity$-$Based Costing Versus Traditional Approach, Activity$-$Based Management. Torres, Inc., produces a wood desk that sells for $$500$ and a wood table that sells for $$900.$ Last year, total overhead costs of $$6,000,000$ were allocated based on direct labor costs. Direct labor costs totaled $$2,000,000$ last year, and the company produced $15,000$ desks and $5,000$ tables. Total direct labor and direct materials costs by product for last year were as follows:

Desk Table

Direct materials $$1,575,000$ $$950,000$

Direct labor $$1,200,000$ $$800,000$

The management of Torres, Inc., would like to use activity$-$based costing to allocate overhead rather than one plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs:

Estimated Cost Driver Activity

Activity Cost Driver Estimated Overhead Costs Desk Table Total

Purchase orders Number of purchase orders $ $800,000910901,000$

Machine setups Number of setups $1,600,000200300500$

Machine maintenance Machine hours $2,400,00043,00017,00060,000$

Quality inspections Number of inspections $1,200,00015,0005,00020,000$

Total

$ $6,000,000$

Required:

Calculate the direct materials cost per unit and direct labor cost per unit for each product.

Using the plantwide allocation method, calculate the predetermined overhead rate and determine the overhead cost per unit allocated to the desk and table products.

Using the plantwide allocation method, calculate the product cost per unit for the desk and table products.

Using the activity$-$based costing allocation method, calculate the predetermined overhead rate for each activity. $($Hint: step $1$ through step $3$ in the activity$-$based costing process have already been done for you; this is step $4.)$

Using the activity$-$based costing allocation method, allocate overhead to each product. $($Hint: This is step $5$ in the activity$-$based costing process.$)$ Determine the overhead cost per unit. Round results to the nearest dollar.

What is the product cost per unit for the desk and table products?

Calculate the per unit profit for each product using the plantwide approach and the activity$-$based costing approach. How much did the per unit profit change when moving from one approach to the other?

Refer to the estimated cost driver activity provided. Calculate the percent of each activity consumed by each product $($for example, the desk product issued $910$ of the $1,000$ purchase orders issued in total and therefore consumes $91$ percent of this activity$).$ These percentages represent the amount of overhead costs allocated to each product using activity$-$based costing. Using the plantwide approach, $60$ percent of all overhead costs are allocated to the desk and $40$ percent to the table. Compare the activity$-$based costing percentages to the percentage of overhead allocated to each product using the plantwide approach. Use this information to explain what caused the shift in overhead costs to the desk product using activity$-$based costing. Activity$-$Based Costing Versus Traditional Approach, Activity$-$Based Management. Torres,

Inc., produces a wood desk that sells for $$500$ and a wood table that sells for $$900.$ Last year,

total overhead costs of $$6,000,000$ were allocated based on direct labor costs. Direct labor costs

totaled $$2,000,000$ last year, and the company produced $15,000$ desks and $5,000$ tables. Total

direct labor and direct materials costs by product for last year were as follows:

The management of Torres, Inc., would like to use activity$-$based costing to allocate overhead

rather than one plantwide rate based on direct labor costs. The following estimates are for the

activities and related cost drivers identified as having the greatest impact on overhead costs: