Problem: Zipper Company has identified the following overhead activities, costs, and activity drivers for the coming year:
Activity Expected Cost Activity Driver Activity Capacity
Setting up $ 120,000 Number of setups 300
equipment 90,000 Number of orders 9,000
Ordering costs 210,000 Machine hours 21,000
Machine costs 100,000 Receiving orders 5,000
Receiving
Zipper produces two models of sewing machines with the following expected prime costs and activity demands:
Model Zee3 Model Vee6
Direct materials $150,000 $200,0000
Direct labour Units $120,00 $120,000
completed Direct 8,000 4,000
labour hours 3,000 1,000
Number of setups 200 100
Number of orders 3,000 6,000
Machine hours 12,000 9,000
Receiving hours 1,500 3,500
The company's normal activity is 4,000 direct labor hours.
Required:
a. Determine the unit cost for each model using direct labor hours to apply overhead.
b. Determine the unit cost for each model using the four activity drivers.
c. Which method produces the more accurate cost assignment? Why?