An ABC team at Drugs ‘R Us, a pharmaceutical company, identified these data for a typical month:

                 

Activity/Resource		Cost-Driver Base	Activity Cost in a Typical Month	Activity Volume in a Typical Month
1.	Unit Level
	1.1 Acquire and use direct material for Product A	Number of units produced	$ 50,000	1,000,000 units
	1.2 Acquire and use direct labor for Product A	Number of direct-labor hours worked	20,000	2,000 direct-labor hours
	1.3 Acquire and use direct material for Product B	Number of units produced	80,000	800,000 units
	1.4 Acquire and use direct labor for Product B	Number of direct-labor hours worked	40,000	2,000 direct-labor hours
2.	Batch Level
	2.1 Quality control	Number of batches	30,000	100 batches
3.	Product Level
	3.1 Provide product-level advertising	Number of promotions	100,000	100 promotions
	3.2 Provide product-level records	Number of products	20,000	2 products
4.	Customer Level
	4.1 Take customer product orders	Number of customer orders	40,000	2,000 customer orders
	4.2 Deal with customer complaints	Number of complaints	20,000	1,000 complaints
5.	Facility Level
	5.1 Supervise direct labor	Amount of direct-labor costs	12,000	$60,000 for activities 1.2 and 1.4 (supervision costs = 20% of direct labor costs.
	5.2 Use main building	Number of square feet	40,000	10,000 square feet

The company’s management wants you to compute the total cost and unit cost of each product for the month of July, which had the following level of activities. (Note: July is not necessarily a typical month.)

          

		Product A	Product B
1.1 and 1.3	Direct material	800,000 units	900,000 units
1.2 and 1.4	Direct labor	1,600 hours	2,100 hours
2.1	Quality control—batches	50 batches	40 batches
3.1	Advertising projects—promotions	50 promotions	40 promotions
3.2	Products recorded	1 product	1 product
4.1	Customer orders	800 customer orders	900 customer orders
4.2	Customer complaints	600 complaints	300 complaints
5.1	Direct-labor supervision	$16,000	$42,000
5.2	Main building use	6,000 sq. ft.	3,000 sq. ft.

Required

a. Compute the cost-driver rate for each cost-driver base.

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b. Use ABC to compute the cost of each of the two products given the activity level for the month of July. Compute both the total cost and unit cost for each product for the month of July.

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c. Assume that the company’s traditional costing system had assigned overhead costs at a rate of $.10 per unit of output plus $20.00 per direct-labor hour. Overhead costs are the sum of the batch-level, product-level, customer-level, and facility-level costs. Using this traditional costing approach, compute the cost of each product (including direct-material and direct-labor costs) given the activity level for the month of July. Compute both the total cost and unit cost for each product for the month of July.

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d. Do the unit costs of the two products computed under ABC and traditional costing systems differ significantly? If so, what causes the differences?