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ABC: Comparison to traditional costing
Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:
Product
DL per Unit
Annual Production
Total DL hours
Big
1.5
10 000 boards
15000
Small
1
35 000 boards
35000
The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labour rate of $13 per hour. The company has historically used direct labour hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1 664 000 per year.
Volume of annual activity
Activity Centre
Cost drivers
Traceable cots
Big board
Small board
Machine setup
Number of setups
$100,000.00
100
Special design
Design hours
$364,000
900
Production
DL hours
$900,000
Machining
Machine hours
$300.000
9000
1000
a. Calculate the overhead rate based on traditional overhead allocation with direct labour hours as the base.
b. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated in question A.)
c. Calculate the overhead rate for each activity centre based on activity-based costing techniques.
d. Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question C.
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