Information - X Estimated Indirect Allocation Estimated Quantity of Activity Activity Costs Base Allocation Base Applications development. $ 3,080,000 New applications 7 new applications Content production Testing 2,000,000 Lines of code 20 million lines 414,000 Testing hours 2,300 testing hours $ 5,494,000 Total indirect costs Gibson is planning to develop the following new applications: X-Page-software for developing personal webpages . X-Secure-commercial security and firewall software X-Page requires 580,000 lines of code and 120 hours of testing, while X-Secure requires 8.7 million lines of code and 600 hours of testing. Gibson expects to produce and sell 50,000 units of X-Page and 14 units of X-Secure. Print Done Gibson develops software for internet applications. The market is very competitive, and Gibson's competitors continue to introduce new products at low prices. Gibson offers a wide variety of software-from simple programs that enable new users to create personal webpages to complex commercial search engines. Like most software companies, Gibson's raw material costs are insignificant. Gibson has just hired Nicole Merrell, a recent university graduate in accounting. Merrell asks Software Department Manager Jeff Gire to join her in a pilot activity based costing study. Merrell and Gire identify the following activities, related costs, and cost-allocation bases: (Click the icon to view the information.) Requirements Requirement 1. Compute the cost allocation rate for each activity. Determine the formula and then compute the cost allocation rate for each activity. (Round your answers to the nearest cent.) Appl. Dev. Content prod. Testing Estimated indirect activity cost Cost allocation base (actual) = 3,080,000 7 = 440,000 Activity overhead rate /application 2,000,000 414,000 == 0.10 180 W line /hour 20,000,000 2,300 Requirement 2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of X-Page and X-Secure. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.) (Round the cost per unit to the nearest cent.) X-Page X-Secure Applications development Content production Testing Total costs Number of units Per unit cost Requirement 3. Gibson's original single-allocation-based costing system allocated indirect costs to products at $47 per programmer hour. X-Page requires 16,000 programmer hours, while X-Secure requires 24,000 programmer hours. Compute the total indirect costs allocated to X-Page and X-Secure under the original system. Then, compute the indirect cost per unit for each product. First, compute the total indirect costs allocated to X-Page and X-Secure under the original single-allocation-based system. Select the formula and then enter the amounts and calculate the indirect cost allocated. Product X-Page X Indirect cost allocated X-Secure X Now compute the indirect cost per unit for each product under the original single-allocation-based system. Begin with X-Page and then compute X-Secure. (Round the cost per unit to the nearest cent.) Total indirect costs allocated / Number of units X-Page X-Secure Per unit cost Requirement 4. Compare the activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did. The original system X-Page and The original system allocated X-Secure. overhead to X-Secure than to X-Page. However, X-Secure required times as many lines of code and Requirement 5. What are the clues that Gibson's ABC system is likely to pass the cost-benefit test? Gibson's different software applications use Gibson has Gibson produces Gibson is in Gibson has costs. times as much testing as X-Page. The ABC system this difference and allocates of the content production and testing costs to X-Secure