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4. (25 points) Natalie Corp. manufactures three models of their product-Version A,
Version B, and Version C. Natalie currently allocates manufacturing overhead costs
to the three model lines based on direct labor costs (a version of traditional
absorption costing), and selling prices are set by computing prices that provide for a
30% margin over computed product costs per unit. Cost and revenue information
Version B Version C
Cost per unit
Selling price per unit
Natalie is concerned that profits are not as high as they could be. Natalie is considering
implementation of an activity-based costing (ABC) system. Overhead costs have been
categorized into three cost pools for ABC purposes: Setup costs would be allocated
using setups as the allocation base, engineering costs would be allocated using number
of components as the allocation base, and Maintenance costs would be allocated using
the number of Maintenance calls as the allocation base. The following activity and cost
information has been compiled:
Direct labor hours
Number of components
Number of Maintenance calls
a. Allocate the overhead costs to the three models using activity-based costing and
compute the cost per unit for each model. b. Provide a possible explanation for why allocating costs based on direct labor
costs may have led to the company?s overall lack of profitability. c. Explain one benefit (simply ?more accurate? is not sufficient) and one drawback
or downside of activity-based costing in comparison with traditional absorption
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Oct 14, 2020EXPERT
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