The Summit Manufacturing Company produces two products. One is a recreational whitewater kayak molded from plastic and designed to perform as a durable whitewater play boat. The other product is a high-performance competition kayak molded with high-tech fiberglass materials that are very light. The recreation kyack is uniform in its dimensions and style. However, the competition kyack is custom designed to fit the individual (e.g., rocker and cockpit size are adjusted). Most of the sales come from the recreation kyacks, but recently sales of the competition kyacks have been increasing. The following information is related to the products for the most recent year:
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Victoria Mason, the president of Summit Manufacturing, is concerned that the traditional cost system used by Summit may not be providing accurate cost information and that the sales price of the competition kyack might not be enough to cover its true cost.
Required:
a. The traditional system that Summit is using assigns 83 percent of the $210,000 total overhead to the recreational kyacks because 83 percent of the direct labor dollars are spent on the recreational kyacks. Discuss why this might not be an accurate way to assign overhead to kyacks.
b. Discuss how Summit might be able to improve cost allocation by using an ABC system.
c. Assume that Summit retains a consultant to create an activity-based costing system, and the consultant develops the following data
Determine the overhead allocation to each line of kyacks using an activity-based costing approach, and compute the total unit costs for each model kyack. Round to three decimal places.
d. Discuss why activity-based allocations are different from those generated by the traditional allocation method used by Summit.