Singo Ltd manufactures two products, Basic and Deluxe model. Total budgeted manufacturing overhead costs are $551,250 and these are allocated between the two products based on direct labour hours. The following cost details are provided concerning the two products:

Management believes that the current system (simple method) of using direct labour hours to apply overhead to production is inaccurate, and is interested in adopting an Activity Based Costing approach. Further analysis revealed that factory overhead is made up of five separate activities, as shown below:

Required

a) Calculate manufacturing costs per unit for each product under a simple method using direct labour hours to base the Overhead rate.

b) Calculate manufacturing costs per unit for each product under Activity Based Costing.

c) Which method do you recommend and why?

Basic Deluxe $4.50 $5.00 $9.00 $4.50 Direct material cost per unit Direct labour cost per unit Direct labour hours Units produced 14,000 2,500 35,000 10,000 Activity Cost pool % of total overhead costs Activity Cost Driver Allocation Basic Deluxe 10% 5 10 30% 7,500 5,000 Production set-ups Machining Materials purchasing Inspection Materials handling 24% Number of production runs Machine hours Number of purchase orders Inspection hours Number of materials requisitions 20 50 22% 3,500 3,850 14% 30 60 100%