Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
The overhead cost per unit of Product B under the traditional costing system is closest to:
A) $2.34
B) $7.74
C) $4.77
D) $34.38

Question

Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:
 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
The overhead cost per unit of Product B under the traditional costing system is closest to:
A) $2.34 
B) $7.74 
C) $4.77 
D) $34.38

Quizplus · Accepted Answer

Direct labor-hour calculation:
 11eacbfc_c8a0_3156_8ffe_819d0bd9cab7_TB7552_00 Predetermined overhead rate = Total estimated overhead ÷ Total estimated direct labor-hours
= $68,756 ÷ 400 direct labor-hours = $171.89 per direct labor-hour
Overhead cost per unit of B = $171.89 per direct labor-hour × 0.2 direct labor-hours per unit
= $34.38 per unit

Adelberg Corporation Makes Two Products: Product a and Product B