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The Smith Company makes three different devices: Model A, Model B, and Model C. The company has been using a traditional costing system with one indirect cost pool based on direct labor hours; however, they are considering changing to an activity-based costing (ABC) system in 2021. The company has analyzed its current indirect cost pool and come up with the following activity cost pools for use in an ABC system in 2021:

Activity cost pool	Cost-allocation base	Indirect costs in cost pool
Product design	Number of design changes	$180,000
Material handling	Number of orders	$424,000
Supervision of direct labor	Direct labor hours	$584,000
Machine maintenance	Machine hours	$612,000

Data for each product in 2021 is as follows:

	Model A	Model B	Model C
Direct materials cost per unit	$6 per unit	$8 per unit	$14 per unit
Direct labor hours (DLH) per unit	0.5 DLH per unit	4 DLH per unit	6 DLH per unit
Direct labor cost per DLH	$15 per DLH	$15 per DLH	$15 per DLH
Units produced	80,000 units	50,000 units	22,500 units
Number of design changes	5 design changes	15 design changes	30 design changes
Number of orders	10,800 orders	6,400 orders	2,800 orders
Machine hours (MH) per unit	0.8 MH PER UNIT	1.3 MH per unit	2.6 MH per unit

1. Calculate the unit product cost for Model A using the traditional costing system.

2. Calculate the unit product cost for Model A using the ABC system.

3.Compare the unit product cost for Model A between these two costing systems. If the company continues to use its traditional costing system, what does that tell you about Model A?

4.If Smith Company continues to use its traditional costing system, what does that tell you about the other two devices? What must be true about them? (no calculations required)

5.Why are your answers in questions 1 and 2 different? Be specific.

6.What characteristics of Smith Company suggest that changing to an ABC system might benefit it? Which costing system do you recommend Smith Company use? Why?

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