Traditional and ABC Costing: Cost per unit

Mathias Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, Mathias uses a traditional costing system with direct labour hours as the allocation base. Actual hours for 2009 were 20,000. In anticipation of developing an activity-based costing system, Mathias has identified the following cost pools and activities associated with pillow production: Estimated Cost Actual Costs Activity Driver for 2010 for 2009 Material cutting Number of cuts $16,000 $13,665 Sewing machine setup 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 2010, Mathias 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. Required: 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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