Office Pro sells two leather phone cases. The products have separate product managers and the company would like to start measuring profitability by product, so that their selling and marketing resources can be allocated efficiently. The selling prices and direct costs are:
| Deluxe Phone Case |
Executive Phone Case |
| Direct Costs per unit |
$4.00 |
$13.00 |
| Sales volume (units) |
90,000 |
6,000 |
The company is unsure if it should allocate the $297,000 of manufacturing overhead, or how to allocate the overhead. The product manager of the Executive Phone Case product believes that overhead should be allocated based on direct labor hours. The accounting department conducted an Activity-Based costing study and determined the following:
| Total Manufacturing Overhead: |
$297,000 |
| Total Direct Labor Hours: |
49,500 |
| Activity-Based Costing Rates: |
Activity |
Deluxe Phone Case |
Executive Phone Case |
| Cutting and Sewing |
$0.40 |
Per direct labor hour |
Direct labor hours |
45,000 |
4,500 |
| Orders |
$150 |
Per order |
No. of orders |
450 |
200 |
| Batches |
$1,198 |
Per batch |
No. of batches |
90 |
60 |
A. Allocate the manufacturing overhead costs to each product (1) using a traditional costing approach with direct labor hours as the cost driver and (2) using Activity-Based Costing. Determine the allocated overhead on a per unit basis for each product using (1) direct labor hours and (2) Activity-Based Costing. Round all numbers to 2 decimals.
B. Which allocation method do you recommend that Office Pro use and why? Be specific and use the data from part A to support your conclusions.