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III Group Problem 1 Howell Manufacturing has identified activity centers to which overhead costs are assigned. The cost pools for these centers and their selected cost drivers for 1993 are as follows: Activity Centers Utilities Scheduling and setup Materials handling Total Overhead Cost Pools $278,000 $260,000 $640,000 $1,178,000 Selected Cost Drivers 60,000 machine hours 780 setups 1,600,000 lbs of materials The company's products and other operating statistics follow: Products Direct costs Machine hours Number of setups Pounds of materials Number of units produced Expected Direct labor hours Actual Direct Labor Hours A $80,000 30,000 130 500,000 40,000 36,000 38,000 $80,000 10,000 380 300,000 20,000 24,000 21,000 $90,000 20,000 270 800,000 60,000 65,000 58,000 Prior to installing an ABC system, Howell management had been pricing its products on the basis of conventional costing using direct labor hours to allocate total overhead. Because the firm operates in a competitive market, it sets prices on only a 20 percent markup on cost. Required: 1. Calculate unit costs based on traditional costing. 2. Determine unit product cost using activity-based costing, 3. Determine selling prices based on unit costs for conventional costing and for ABC costs. 4. Discuss the problems related to setting prices based on conventional costing and how ABC improves the information