Annika Company uses activity-based costing. The company has two products: A andB. The annual production and sales of Product A is 4,000 units and of Product B is 1,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:$\begin{array}{lrr}
&\text { Estimated}&& \text { Expected Activity }\
\text { Activity Cost Pool }&\text { cost }&\text { ProductA}&\text { Product B}&\text { Total }\
\text {Activity 1. } &£ 18,000& 700 & 300 &1,100\
\text { Activity 2. } &£ 24,000 & 500 & 100 &600\
\text { Activity 3.} &£ 60,000 &800 &400&1,200\
\end{array}$

The cost per unit of Product A under activity-based costing is closest to

A)£20.40.
B)£10.00.
C)£18.15.
D)£17.00.

Question

Annika Company uses activity-based costing. The company has two products: A andB. The annual production and sales of Product A is 4,000 units and of Product B is 1,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:$\begin{array}{lrr}
&\text { Estimated}&& \text { Expected Activity }\
\text { Activity Cost Pool }&\text { cost }&\text { ProductA}&\text { Product B}&\text { Total }\ 
 \text {Activity 1.  } &£ 18,000& 700 & 300 &1,100\
 \text { Activity 2. } &£ 24,000 & 500 & 100 &600\
 \text {  Activity 3.} &£ 60,000 &800 &400&1,200\
\end{array}$

The cost per unit of Product A under activity-based costing is closest to

A)£20.40.
B)£10.00.
C)£18.15.
D)£17.00.

Quizplus · Accepted Answer

Activity-based costing allocates costs to products based on the activities that actually drive those costs.

For Product A, there are three cost pools:

- Setup ($16,000 total cost / 200 setups) = $80 per setup 
- Machining ($80,000 total cost / 8,000 machine hours) = $10 per machine hour 
- Packing and shipping ($20,000 total cost / 4,000 units) = $5 per unit

Product A requires:

- 50 setups (4,000 units / 80 units per setup) 
- 2,000 machine hours (4,000 units x 0.5 hours per unit x 2 operations)

So the total cost per unit of A is:

- (50 x $80) + (2,000 x $10) + (4,000 x $5) = $4,000 + $20,000 + $20,000 = $44,000 
- $44,000 / 4,000 units = £18.15 per unit

Therefore, the closest answer choice is C) £18.15.

Annika Company Uses Activity-Based Costing The Cost Per Unit of Product a Under Activity-Based Costing