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Knickknack, Inc., manufactures two products: odds and ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows:

	Odds			Ends
Production quantity		1,000	units		5,000	units
Direct material	$	160		$	240
Direct labor (not including setup time)		120	(4 hr. at $30)		180	(6 hr. at $30)
Manufacturing overhead*		384	(4 hr. at $96)		576	(6 hr. at $96)
Total cost per unit	$	664		$	996

*Calculation of predetermined overhead rate:

Manufacturing overhead budget:
Machine-related costs	$	1,800,000
Setup and inspection		720,000
Engineering		360,000
Plant-related costs		384,000
Total	$	3,264,000

Predetermined overhead rate:

Budgeted manufacturing overhead	=	$3,264,000
			= $96 per direct-labor hour
Budgeted direct-labor hours		(1,000)(4) + (5,000)(6)

Knickknack, Inc., prices its products at 120 percent of cost, which yields target prices of $796.80 for odds and $1,195.20 for ends. Recently, however, Knickknack has been challenged in the market for ends by a European competitor, Bricabrac Corporation. A new entrant in this market, Bricabrac has been selling ends for $880 each. Knickknacks president is puzzled by Bricabracs ability to sell ends at such a low cost. She has asked you (the controller) to look into the matter. You have decided that Knickknacks traditional, volume-based product-costing system may be causing cost distortion between the firms two products. Ends are a high-volume, relatively simple product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.

The following cost drivers have been identified for the four activity cost pools.

Activity Cost Pool	Cost Driver	Budgeted Level of Cost Driver
Machine-related costs	Machine hours		18,000	hr.
Setup and inspection	Number of production runs		80	runs
Engineering	Engineering change orders		200	change orders
Plant-related costs	Square footage of space		3,840	sq. ft.

You have gathered the following additional information:

	Each odd requires 8 machine hours, whereas each end requires 2 machine hours.
	Odds are manufactured in production runs of 25 units each. Ends are manufactured in 125 unit batches.
	Three-quarters of the engineering activity, as measured in terms of change orders, is related to odds.
	The plant has 3,840 square feet of space, 80 percent of which is used in the production of odds

4 value: 1.43 points 2. For each activity cost pool, compute a pool rate. Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Pool Rate 100 per machine hour per run 1,800 per change order per square feet

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