Question - After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Rey found that setup costs, inspection costs, and utility costs made up most of its overhead.

Additional information about overhead follows.

Activity Cost Driver Cost Driver

Setting up machines $20,000 25 batches

Inspecting components $7,500 5,000 parts

Providing utilities $10,000 5,400 machine hours

Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 6.15.

Direct materials $ 2,500 Number of parts 400 parts

Direct labor $3,500 Machine hours 600 machine hours

Batches 2 batches

Required:

1. What is the total cost of Job 6.15 if Business Solutions applies overhead at 50% of direct labor cost?

2. What is the total cost of Job 6.15 if Business Solutions uses activity-based costing?

3. Which approached to assigning overhead gives a better representatives of the costs incurred to produce Job 6.15? Explain.