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:

Organizational Behavior

The study of how individuals and groups interact within an organization, focusing on improving organizational effectiveness, culture, and employee well-being.

Autocratic Model

A leadership or governance style characterized by individual control over all decisions and little input from group members.

Bureaucracies

Administrative systems organized into hierarchical structures, governing organizations with strict rules and protocols to ensure efficiency and order.

Behavior Patterns

Repetitive and habitual ways of acting or responding that characterize an individual or group over time.