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Activity Based Costing

Pitney Corporation manufactures two types of transponders-no. 156 and no. 157-and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.

No. 156 No. 157
Anticipated Volume (units) 6,000 14,000
Direct Material Cost $40 $65
Direct labor Cost 25 25

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow.

No. 156 No. 157 Total
Setups 60 40 100
Machine Hours Worked 15,000 25,000 40,000
Outgoing Shipments 120 80 200

The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.

Required:
A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

Solution Summary

The solution computes cost based on Activity Based Costing for Pitney Corporation.

$2.19