Exercise 5-6AComputing overhead rates based on different cost drivers

Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows.

Activity Pools	Cost Pool Total	Cost Driver
Repair and maintenance on assembly machine	$ 104,000	Number of units produced
Programming cost	168,000	Number of programming hours
Software inspections	12,000	Number of inspections
Product testing	16,000	Number of tests
Total overhead cost	$300,000

Expected activity for each product follows.

	Number of Units	Number of Programming Hours	Number of Inspections	Number of Tests
Decoder P	16,000	2,000	190	1,400
Decoder Q	36,000	1,500	60	1,100
Total	52,000	3,500	250	2,500

Required

1. Compute the overhead rate for each activity pool.
2. Determine the overhead cost allocated to each product.

Exercise 5-7AComparing an ABC system with a traditional costing system

Use the information inExercise 5-6Ato complete the following requirements. Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow.

	Direct Labor Hours
Decoder P	8,000
Decoder Q	16,000
Total	24,000

Required

1. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base.
2. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC. Round your figures to two decimal points.
3. Explain why the per-unit overhead cost is lower for the high-volume product when using ABC.