LO.4 (ABC) Louisiana Leisure makes umbrellas, gazebos, and chaise lounges. The company uses a traditional overhead allocation scheme and assigns overhead to prod- ucts at the rate of $30 per direct labor hour. The costs per unit for each product group in 2010 were as follows:
|
Umbrellas |
Gazebos |
Chaise Lounges |
| Direct material |
$12 |
$120 |
$ 12 |
| Direct labor |
18 |
135 |
45 |
| Overhead |
24 |
180 |
60 |
| Total |
$54 |
$435 |
$117 |
Because protability has been lagging and competition has been getting more intense, Louisiana Leisure is considering implementing an activity-based costing system for 2011. In analyzing the 2010 data, management determined that its $12,030,000 of factory overhead could be assigned to four basic activities: quality control, setups, material handling, and equipment operation. Data for the 2010 costs associated with each of the four activities follow.
| Quality Control |
Setups |
Material Handling |
Equipment Operation |
Total Costs |
| $630,000 |
$600,000 |
$1,800,000 |
$14,970,000 |
$18,000,000 |
Management determined that the following allocation bases and total 2010 volumes for each allocation base could have been used for ABC: Activity Base Quality control Number of units produced Setups Number of setups Material handling Pounds of material used Equipment operation Number of machine hours Volume measures for 2010 for each product and each allocation base were as follows:
|
Umbrellas |
Gazebos |
Chaise Lounges |
| Number of units |
300,000 |
30,000 |
90,000 |
| Number of setups |
600 |
1,300 |
1,100 |
| Pounds of material |
1,200,000 |
3,000,000 |
1,800,000 |
| Number of machine hours |
600,000 |
1,100,000 |
1,300,000 |
How much direct labor time is needed to produce an umbrella, a gazebo, and a chaise lounge? For 2010, determine the total overhead allocated to each product group using the traditional allocation based on direct labor hours. For 2010, determine the total overhead that would have been allocated to each product group if activity-based costing were used. Compute the cost per unit for each product group. Louisiana Leisure has a policy of setting sales prices based on product costs. How would the sales prices using activity-based costing di?er from those obtained using the traditional overhead allocation?