Cost Pool

Factory overhead costs

Activity cost driver

Expected activity level

Machine setup

$ $100,000$ Setup hours $1,000$

Inspection

$50,000$ Inspection hours $2,500$

Power

$50,000$ Kilowatt hours $25,000$

Supervision

$100,000$ Direct labor hours $10,000$

Total overhead cost

$ $300,000$

Demski Company has used a two$-$stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two production departments, P$1$ and P$2,$ based on machine hours. In the second stage, Demski uses direct labor hours to assign overhead costs from the production departments to individual products A and B$.$

Budgeted factory overhead costs for the year are $$300,000.$ The budgeted and actual machine hours for P$1$ are $12,000$ hours. The budgeted and actual machine hours for P$2$ are $28,000$ hours.

After attending a seminar to learn the potential benefits of adopting an activity$-$based costing system $($ABC$),$ Ted Demski, the president of Demski Company, is considering implementing an ABC system. Upon his request, the controller at Demski Company has compiled the following information for analysis

Ace

Bex

Units produced and sold

$5,00010,000$

Direct materials

$ $200,000$ $ $250,000$

Direct labor costs

$ $80,000150,000$

Direct labor hours in P$1$

$1,5003,000$

Direct labor hours in P$2$

$1,5004,000$

Machine setup hours

$700300$

Inspection hours

$1,5001,000$

Power $($kilowatt hours$)$

$12,50012,500$

Demski manufactures two types of products, Ace and Bex, for which the following information available:

Question Four $($Continued$)$

Required:

Determine the unit cost for each of the two products using the two$-$stage allocation method. $($Round calculations to $2$ decimal places.$)$

Determine the unit cost for each of the two products using the proposed ABC system.

Compare the unit manufacturing costs for product Ace and product Bex computed in requirements $1$ and $2.($a$)$ Why do two the cost systems differ in their total cost for each product? $($b$)$ Why might these differences be important to the Demski Company?