Problem:
Mission Bearings Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, "Deluxe" and "Ultra", about which it has provided the following data:
"Deluxe" "Ultra"
Direct materials per unit $29.20 $47.40
Direct labor per unit $1.10 $23.10
Direct labor-hours per unit 0.10 2.10
Annual production 35,000 15,000
The company's estimated total manufacturing overhead for the year is $1,147,650 and the company's estimated total direct labor-hours for the year is 35,000.
The company is considering using activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
Activities and Activity Measures Estimated Overhead Cost
Assembling products (DLHs) $140,000
Preparing batches (batches) 241,150
Axial milling (MHs) 766,500
Total $1,147,650
Cost Drivers/Activity Level of Each
Measures
Deluxe Ultra Total
Assembling products 3,500 31,500 35,000
Preparing batches 560 1,295 1,855
Axial milling 1,540 1,015 2,555
a. Determine the manufacturing overhead cost per unit of each of the company's two products under the "traditional costing system".
b. Determine the manufacturing overhead cost per unit of each of the company's two products under "Activity-based costing system".
c. Explain the difference in the unit costs of each product using the different systems of overhead accounting. Be sure to provide appropriate quantitative analysis in your explanation.