Problem 1 Activity Based Costing (20 marks)

Problem 1 Activity Based Costing (20 marks)

Uni Fassion Company has two product lines: T-shirts and Sweatshirts. The Company's simple costing system has two direct cost categories (materials and labor) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of direct labor hours (DLHs), which is estimated to be 80,000 DLHs. Total indirect costs are budgeted to be $464,000. The following activity and cost information has been compiled for the month of September: Faced with fierce market competition and profit erosion in recent months, the Company decided to revamp its current assignment of overhead costs by implementing the activity-based costing (ABC). The direct cost categories are the same. The following ABC cost information are provided: Additionally, the following activity information is gathered with respect to the two product lines: Required: Under the simple costing system, determine the following: a. What's the manufacturing overhead allocation rate? (2 marks) b. Compute the product costs per unit for a T-shirts and a Sweatshirts. (4 marks) Under the activity-based costing, determine the following: c. Compute the product costs per unit for a T-shirts and a Sweatshirts. (8 marks) d. Explain what broad-averaging is. What product is over-costed and what product is under-costed? ( 3 marks) e. Suppose a customer offers to buy the sweatshirts at $22 each. Will you be willing to sell at this price? Why? (Consider your decision under both traditional simple costing system and the ABC system)