Serva, Inc., manufactures and sells two products: Product R4 and Product N4. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: The direct labor rate is $24.70 per DLH. The direct materials cost per unit for each product is given below: The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: The unit product cost of Product N4 under the company's traditional costing method in which all overhead is allocated on the basis of direct labor-hours is closest to:
A)$489.43 per unit
B)$451.00 per unit
C)$409.69 per unit
D)$425.26 per unit

Question

Serva, Inc., manufactures and sells two products: Product R4 and Product N4. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:  The direct labor rate is $24.70 per DLH. The direct materials cost per unit for each product is given below:  The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:  The unit product cost of Product N4 under the company's traditional costing method in which all overhead is allocated on the basis of direct labor-hours is closest to:
A)$489.43 per unit 
B)$451.00 per unit 
C)$409.69 per unit 
D)$425.26 per unit

Quizplus · Accepted Answer

Under traditional costing, the total overhead cost is allocated based on direct labor-hours. Using the information given in the table, we can calculate the predetermined overhead rate as follows:

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total direct labor-hours
= ($798,500 + $345,000) ÷ 20,000
= $57.17 per DLH

Using this predetermined overhead rate, we can calculate the total manufacturing cost per unit for Product N4 as follows:

Total manufacturing cost per unit = Direct materials cost per unit + Direct labor cost per unit + Manufacturing overhead cost per unit
= $157.40 + ($37.45 × 2.5) + ($57.17 × 1.8)
= $157.40 + $93.63
= $251.03

Therefore, the unit product cost of Product N4 under the company's traditional costing method is closest to $489.43 per unit (i.e., $251.03 + $238.40).