Addy Company makes two products: Product A and Product B. Annual production and sales are 1,700 units of Product A and 1,100 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 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $98,785.

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 activity-based costing system is closest to:
A)$50.66
B)$26.09
C)$35.28
D)$38.16

Question

Addy Company makes two products: Product A and Product B. Annual production and sales are 1,700 units of Product A and 1,100 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 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $98,785.

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 activity-based costing system is closest to:
A)$50.66 
B)$26.09 
C)$35.28 
D)$38.16

Quizplus · Accepted Answer

The activity rates for each activity cost pool are computed as follows:
 11eaa48f_7b83_6a40_9e4a_af48edff265a_TB2485_00
 The overhead cost charged to Product B is:
 11eaa48f_7b83_9151_9e4a_d51b6df23adb_TB2485_00 Overhead cost per unit of Product B = $41,974.80 $\div$ 1,100 units = $38.16 per unit

Addy Company Makes Two Products: Product a and Product B