Surfs Up manufactures surfboards.

The company produces two models the small and the

big board. Data regarding the two are as flows:
Product Direct Labor (DL) Annual Total direct labor
hrs per unit production hrs

Big 1.5 10,000 boards 15,000

Small 1.0 35,000 boards 35,000

The big board requires Rs. 3,750 in direct materials (DM) per unit, whereas the small
board requires Rs. 2,000. The company pays an average DL rate of Rs. 650 per hour.
The company has historically used DL hours as the allocation based for applying
overhead to the boards. Manufacturing overhead is estimated to be Rs. 8,32,00,000 per
year.

The big board is more complex to manufacture than the small board because it requires
more machine time. Blake Moore, the company’s controller is considering the use of
activity-based costing to apply overhead because of machining, Blake has identified the
following four separate activity centers:

Activity center Cost driver Traceable Volume of annual activity

costs
Big board Small board

Machine setup Number of 50,00,000 100 100

setups

Special design Design hours 1,82,00,000 900 100

Production Direct labor 4,50,00,000 15,000 35,000

hours

Machining Machine hours 1,50,00,000 9,000 1,000

Required:

A. Calculate the overhead rate based on traditional overhead allocation method.

B. Determine the total cost to produce one unit of each product using traditional
overhead allocation method.
C. Calculate overhead rate for each activity center based on ABC techniques
D. Determine the total cost to produce one unit of each product using ABC method.
E. Explain why overhead cost shifted from high-volume product to the low-volume
product under ABC.