EXERCISE 8-17 (CONTINUED)

3. The unit product cost of the high-volume product, Parcel, declines under

the activity-based costing system, whereas the unit product cost of the

low-volume product, Rascon, increases. This occurs because half of the

overhead is applied on the basis of engineering design hours instead of

direct labor-hours. When the overhead was applied on the basis of di-

rect labor-hours, most of the overhead was applied to the high-volume

product. However, when the overhead is applied on the basis of engi-

neering-hours, more of the overhead cost is shifted over to the low-

volume product. Engineering-hours is a product-level activity, so the

higher the volume, the lower the unit cost and the lower the volume,

the higher the unit cost.