Precision Manufacturing Inc. (PMI) makes two types of industrial component parts-the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company's conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: EX300 TX500 Total Direct materials $366,325 $162,550 $528,875 Direct labor $120,000 $42,500 $162,500 The company is considering implementing an activity-based costing system the distributes all of its manufacturing overhead to four activities as shown below: Activity Cost Pool(and activity measure) Manufacturing overhead Activity EX300 TX500 Total Machining(machine-hour) $198,250 90,000 62,500 152,500 Setups(setup hours) 150,000 75 300 375 Product-level(number of products) 100,250 1 1 2 General factory(direct labor dollars) 60,125 120,000 42,500 162,500 Total manufacturing overhead cost 508,625
REQUIRED:
1. Compute the plantwide overhead rate that would be used in the company's conventional cost system. Using the plantwide rate, compute the unit product cost for each product.
2. Compute the activity rate for each activity cost pool. Using the activity rates, compute the unit product cost for each product.
3. Why do the conventional and activity-based cost assignments differ from one another?