Problem $3$: Activity Based Costing

Clifton Inc. manufactures two models of an electronic device: Basic and Deluxe, in a continuous production process.

The units produced, direct material $($DM$)$ and direct labor $($DL$)$ costs per unit of the two products are as follows:

Indirect manufacturing overheads for the period are estimated at $$716,000.$

Overheads are currently allocated to products using the total number of direct hours worked.

The company is about to implement an activity$-$based costing $($ABC$)$ system and analysis of

overhead has identified the following activity cost pools and cost drivers:

The activity$-$base usage quantities and units produced for the three products were determined from corporate records and are as follows:

Required:

A$.$ Calculate a predetermined overhead allocation rate $($POHR$)$ using Traditional cost allocation method, assuming that all

manufacturing overheads costs are allocated using the total direct labor $($DL$)$ hours worked.

$|$per DL hour

B$.$ Calculate the total cost per unit for each product using the traditional cost allocation rate calculated in part A$).$

$($HINT: do not forget the direct costs for each product$)$

C$.$ Determine the activity rate for each activity. Round all per unit amounts to the nearest cent.

Formula: Activity rate $=$ Activity cost pool $$ Number of activity base

D$.$ Determine the total and per$-$unit activity cost for all three products and then compute the total product cost per unit.

Round all total costs to whole number and round all per unit amounts to the nearest cent.

Formula: Activity$-$Base Usage x Activity rate from Req. $(1)=$ Activity cost;

Sum all activity costs per product to determine the total activity costs and

Divide the total activity costs by budgeted units to compute the activity costs per unit for each product.

E$.$ Assume that Clifton received an offer to sell $3,000$ units of Basic at a price of $$252\mathrm{.}00$ per unit.

Prepare a profitability analysis report using the format below to determine which costing method would help the manager

of Clifton make better decsion for enhancing the profitability of the company. Explain your answer.

Explanation: