Activity-Based Costing

Boulware Products, Inc. produces printers for wholesale distributors. It has just completed packaging an order from Shawl Company for 450 printers. Before the order is shipped, the controller wants to compare the unit costs computed under the company’s new activity-based costing system with the unit costs computed under its traditional costing system. Boulware’s traditional costing system assigned overhead costs at a rate of 240 percent of direct labor cost.

Data for the Shawl order are as follows: direct materials, $17,552; purchased parts, $14,856; direct labor hours, 140; and average direct labor pay rate per hour, $17.

Data for activity-based costing related to processing direct materials and purchased parts for the Shawl order are as follows:

Activity	Cost Driver	Activity Cost Rate	Activity Usage
Engineering	Engineering	$28 per engineering	18 engineering
systems design	hours	hour	hours
Setup	Number of	$36 per setup	12 setups
Â	setups	Â	82 machine
Parts production	Machine hours	$37 per machine hour	hours
Product assembly	Assembly hours	$42 per assembly hour	96 assembly hours
Packaging	Number of	$5.60 per package	150 packages
Â	packages	Â	Â
Building	Machine hours	$10 per machine	82 machine
occupancy	Â	hour	hours

Required

1. Use the traditional costing approach to compute the total cost and the product unit cost of the Shawl order.

2. Using the cost hierarchy, identify each activity as unit level, batch level, product level, or facility level.

3. Prepare a bill of activities for the activity costs.

4. Use ABC to compute the total cost and product unit cost of the Shawl order.

5. What is the difference between the product unit cost you computed using the traditional approach and the one you computed using ABC? Does the use of ABC guarantee cost reduction for every order?