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Short Round Inc manufactures two types of hats, fedoras and baseball caps. Fedoras require 2 hours of direct labor per unit to manufacture fedoras compared to 1 hour of direct labor per unit to produce baseball caps. Overhead is currently allocated to the two products on the basis of direct labor hours. Short Round estimated it would incur $510,000 in manufacturing overhead costs, and produce 10,000 units of fedoras and 40,000 units of baseball caps during the current year.

Unit costs for direct materials and direct labor are as follows:

	Baseball Caps	Fedoras
Direct materials per unit	$11	$24
Direct labor per unit	$6	$12

1. What is the unit product cost of each product under the current overhead allocation method?

2. Short Round is considering the use of activity-based costing as an alternative to its current overhead allocation method. Data relating to the companys activity cost pools for the current year are given below:

		Expected Activity Levels
	Estimated OH costs	Baseball Caps	Fedoras	Total
Machine setups	$204,000	800	1,600	2,400
Purchase orders	$43,500	500	100	600
Machine-hours	$105,000	7,000	10,500	17,500
Maintenance requests	$157,500	650	850	1,500

Using the data above, what is the revised unit product cost of each product under the activity-based costing system?

3. Compare your answers to parts a and b. What overhead activities seem to contribute to the differences you observe?

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