Chapter 4, Problem 12P

Contrasting ABC and Conventional Product cost L04−2, L04−3, L04−4
Precision Manufacturing Inc. (PMI) makes two types of industrial component parts−the EX300 and the
TX500. It annually produces 60,000 units of EX300 and l2500 units of TXSOO. The company’sconventional cost system allocates manufacturing overhead to products using a plant wide overhead rateand direct labor dollars as the allocation base. Additional information relating to the company’s twoproduct lines is shown below:

The company is considering implementing an activity-based costing system that distributes all of its
manufacturing overhead to four activities as shown below:

Required:
1. Compute the plant wide overhead rate that would be used in the company’s conventional cost system.
Using the plant wide rate. Compute the unit product cost for each product.
2. Compute the activity rate for each activity cost pool. Using the activity rates, compute the unit productcost for each product.
3. Why do the conventional and activity-based cost assignments differ from one another?