Cross Roads Manufacturing currently uses a traditional costing system. The company allocates overhead to its two products, Zips and Dees, using a predetermined manufacturing overhead rate based on direct labor hours. Here is data related to the company's two products: Information about the company's estimated manufacturing overhead for the year follows: Total estimated direct labor hours for the company for the year are 110,000 hours.
The company is evaluating whether it should use an activity-based costing system in place of its traditional costing system. Additional information about production needed for the activity-based costing system follows: The amount of manufacturing overhead that would be allocated to one unit of Dees using an activity-based costing system would be closest to
A)$94.82.
B)$64.46.
C)$48.53.
D)$13.20.

Question

Cross Roads Manufacturing currently uses a traditional costing system. The company allocates overhead to its two products, Zips and Dees, using a predetermined manufacturing overhead rate based on direct labor hours. Here is data related to the company's two products:  Information about the company's estimated manufacturing overhead for the year follows:  Total estimated direct labor hours for the company for the year are 110,000 hours.
The company is evaluating whether it should use an activity-based costing system in place of its traditional costing system. Additional information about production needed for the activity-based costing system follows:  The amount of manufacturing overhead that would be allocated to one unit of Dees using an activity-based costing system would be closest to
A)$94.82. 
B)$64.46. 
C)$48.53. 
D)$13.20.

Quizplus · Accepted Answer

In activity-based costing system, overhead costs are allocated based on activities that drive those costs. 
Total estimated overhead cost for the year is $682,500. 
Activity cost per unit of Dees:
Activity 1: (3500/4000) x $225,000 = $196,875 
Activity 2: (2000/3000) x $225,000 = $150,000 
Activity 3: (500/1000) x $225,000 = $112,500 
Total activity cost per unit of Dees = $196,875 + $150,000 + $112,500 = $459,375 / 9000 Dees = $51 per Dee. 
Therefore, the overhead that would be allocated to one unit of Dees using ABC system is  $51. 
Adding direct material and direct labor cost per unit of Dees, total cost per unit is $38 + $43 + $51 = $132.

Cross Roads Manufacturing Currently Uses a Traditional Costing System