Summer Daze Corporation manufactures two products, Bocce Ball Sets and Croquet Sets. Croquet Sets were added as a product line two years ago. Croquet Sets are the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to one-half hours of direct labour time for Bocce Ball Set. Croquet Sets are produced on an automated production line.
Indirect costs are currently allocated to the products on the basis of direct labour hours. The company estimated it would incur $332,500 in manufacturing overhead costs and produce 6,000 units of Croquet Sets and 20,000 units of Bocce Ball Sets during the current year.
Unit costs for materials and direct labour are:
Bocce Ball Set Croquet Set
Direct labour $9 $18
Direct materials $12 $16
Indirect costs are:
Estimated
Estimated Activity Estimated
Indirect Bocce Ball Activity
Costs Sets Croquet Sets Total
Activity cost pools/drivers:
Machine setups $153,000 700 1,000 1,700
Purchase orders 27,500 300 200 500
Machine hours 128,000 5,000 11,000 16,000
Maintenance requests 24,000 200 300 500
Total $332,500
Required:
a. Determine the unit cost of a Bocce Ball Set using traditional (simple) costing with units as the allocation base.
b. Determine the unit cost of a Bocce Ball Set using activity-based costing.