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Finance Management

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ACTIVITY-BASED COSTING PROBLEM 1. Contrasting Traditional Costing & Activity-Based Costing
The Columbus Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products.
The company expects to produce 4,000 computer parts and 2,000 cell phones in 2014. Each computer part requires two direct labor hours to produce and each cell phone requires half hour to produce.

The direct material and direct labor costs included in the two products are as follows: Item | Computer Part | Cell-Phone | Direct Material (per unit) | $30 | $17 | Direct Labor (per unit) | $16 | $ 4 |

Budgeted (Estimated) Total Factory Overhead Data For 2014: Activity | Budgeted Overhead Dollars | Estimated Volume Level | Production Setups | $80,000 | 20 setups | Material Handling | $70,000 | 5,000 lbs. | Packaging and Shipping | $120,000 | 6,000 boxes | Total Factory Overhead | $270,000 | |

Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 2014: Activity | Computer Parts | Cell Phones | Overall Totals | Production Setups | 5 setups | 15 setups | 20 setups | Material Handling | 1,000 lbs. | 4,000 lbs. | 5,000 lbs. | Packaging and Shipping | 4,000 boxes | 2,000 boxes | 6,000 boxes |
Required:
1. Calculate the cost of each product using a direct labor hours. 2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping. 3. Cost out the two products using an activity-based costing system.

2. Dunn Company produces two products, Fred and

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