Part 3: Activity-Based Costing

Wayfarer Corporation is contemplating changing its cost system to an activity-based costing system and wants to know more about the effects of doing so. The corporation's cost accountant has identified three overhead cost pools along with the cost drivers associated with each pool as follows:

Cost Pools Costs Activity Drivers

Utilities: $5,420,000 180,000 machine hours

Delivery: $5,420,000 10,000 deliveries

Assembly: $10,940,000 2,000,000 pounds of material

The Corporation makes three models of kitchen sinks (Deluxe, Premium, and Standard). The plans for production for the next year and the direct costs that have been budgeted for activity by product are listed below:

Products

Deluxe Premium Standard

Total direct costs (material and labor):

$850,000 $850,000 $850,000

Total machine-hours:

210,000 95,000 154,000

Total deliveries:

310 620 480

Total pounds of material:

1,800,000 1,200,000 2,600,000

Total direct labor-hours:

12,400 8,500 18,600

Number of units produced:

18,000 12,000 24,000

QUESTIONS:

A)The current cost accounting system charges overhead to products on the basis of direct labor-hours. What unit product costs will be reported for the three products assuming the current cost system continues to be used?

B)What are the cost driver rates associated with the three cost pools specified by the cost accountant?

C)What unit product costs will be reported for the three products if the ABC system suggested by the cost accountants categorization of cost pools is utilized?