Problem E Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashion. Sunshield presently allocates overhead products using a rate based on direct labor hours. A consultant recommended that sunshield switch to activity based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver.

Activity	Recommended cost driver	Costs	Est.Cost Driver units
Production Setup	Production Units	$30,000	100 runs
Over processing	Orders	$50,000	200 orders
Material handling	pounds of material used	$20,000	8,000 lbs
Equipment depreciation and maintenance	Machine- hours	$60,000	10,000 machine hours
Quality management	Inspections	$50,000	40 inspections
Packing and Shipping	Units shipped	$40,000	20,000 units
Total Overhead		$250,000

In addition, there are 2,500 direct labor-hours in a typical year. Assume the following activities occurred in February of 2013.

	Nerds	Stars	Fashion
Units produced	1000	500	400
Direct material Cost	$4000	$2500	$2000
Direct Labor Hours	100	100	89
Orders	8	8	4
Production Runs	2	4	8
Pounds of material	400	200	200
Machine Hours	500	300	300
Inspections	2	2	2
Units Shipped	1,000	500	300

Direct labor costs are $15 per hour.

a) Compute an overhead allocation rate (1) for each of the cost drivers recommended by the consultant and (2) for direct labor.

b. Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor-hours as the allocation base. (Note: Production costs are direct materials, direct labor, and overhead.)

c. To drive product costs under ABC, compute the production costs for each product for February using the cost drivers recommended by the consultant. d. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using direct labor-hours as the allocation base and using activity-based costing. Write a brief response to management.