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?

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