Plata Company has identified the following overhead activities, costs and activity drivers for the coming year:
Setting up equipment $120,000 Number of setups 300
ordering costs: $90,000 Number of orders 9,000
machine costs: $210,000 Machine hours 21,000
receiving: $100,000 Receiving hours 5,000
Plata produces two models of dishwashers with the following expected prime costs and activity demands:
Model A: Model B
Direct Materials: $150,000 $200,000
Direct labor: $120,000 $120,000
Units completed: 8,000 $4,000
Direct labor hours: 3,000 $1000
Number of setups: 200 100
Number of orders: 3,000 6,000
Machine hours: 12,000 9,000
Receiving hours: 1,500 3,500
The company’s normal activity is 4,000 direct labor hours
1. Determine the unit cost for each model using direct labor hours to apply overhead.
2. Determine the unit cost for each model using the four activity drivers.
3. Which method produces the more accurate cost assignment? Why?