Kall Company produces cellular phones. It has just completed an order for 10,000 phones placed by Connect, Ltd. Kall recently shifted to an activity-based costing sys- tem, and its controller is interested in the impact that the ABC system had on the Connect order. Data for that order are as follows: direct materials, $36,950; pur- chased parts, $21,100; direct labor hours, 220; and average direct labor pay rate per hour, $15.
Under Kall's traditional costing system, overhead costs were assigned at a rate of 270 percent of direct labor cost.
Data for activity-based costing for the Connect order follow.
Activity Cost Driver Activity Cost rate Activity Usage Electrical engineering design Engineering hours $19 per engineering hour 32 engineering hours Setup Number of setups $29 per setup 11 setups
Parts production Machine hours $26 per machine hour 134 machine hours Product testing Number of tests $32 per test 52 tests
Packaging Number of packages $0.0374 per package 10,000 packages Building occupancy Machine hours $9.80 per machine hour 134 machine hours Assembly Direct labor hours $15 per direct labor hour 220 direct labor hours
Required:
1. Use the traditional costing approach to compute the total cost and the product unit cost of the Connect order. (Round unit costs to the nearest cent.)
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 Connect order. (Round activity costs to the nearest dollar, and round unit costs to the nearest cent.)
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?