## What strategies could have gone wrong by adopting POHR?

Q1. Inverta Inc. manufactures two types of inverters – 1. Power and 2. Normal.
Following are the expenses incurred on manufacturing:

 Power \$ Normal \$ Direct Material per Unit 25 15 Direct Labor Cost 70 30 Direct Labour Time 2 hours 8 hours Units 12000 40000

Estimated overheads for the time period are:

 Activity Cost Overhead Cost for Units of Activity Cost Pool Driver Activity Power Normal
 Repair cost pool Orders 108000 200 50 Set-up cost pool Runs 72000 150 50 Heating cost pool Sq. Ft. 24360 34000 6000 Machine cost pool Hours 45240 45000 5000 Total Overhead 249600

1. Consider that overhead is allocated on the basis of direct labor hours, calculate cost price per unit using pre-determined overhead application rate.
2. Now using the activity base costing, calculate cost price per unit.
3. Compare the pricing from two different methods –POHR and ABC and suggest which method do you think give more precise answer. What strategies could have gone wrong by adopting POHR?
4. How supervisors would make an assessment of cost driver to use for ABC costing?

### determine values for K7 and K8.

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