BCH Corporation Produces and Sells Two Types of Sofa Pillows

question 79

Essay

BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labour hours as the allocation base. Actual hours for 20x3 were 20,000. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production:
Estimated Costs Actual Costs
Activity Driver for 20x4 for 20x3
Material cutting Number of cuts $16,000 $13,665
Sewing machine setups Number of setups 27,000 24,800
Factory maintenance Number of direct labour hours 15,000 17,000
$58,000 $55,465
Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labour (15 minutes @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 for direct labour (30 minutes @ $8.00 per hour). In 20x4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.
a)Calculate the cost per unit for each type of pillow under traditional costing.
b)Calculate the cost per unit for each type of pillow under ABC.
c)Under traditional costing, which type of pillow cross-subsidizes the other pillow? Explain.

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Definitions:

Departmental Overhead Rates

Costs associated with a department's operations that are distributed across products or services, often based on a predetermined rate.

Machine Hours

A measure used in costing to allocate costs based on the number of hours a machine is operated.

Direct Labor Hours

A measure of the total hours worked directly on producing goods, typically used in manufacturing and cost accounting.

Departmental Overhead Rate

A method used to allocate indirect costs to specific departments based on their respective activities or usage.