Jasmine Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 10,000 units and of Product B is 4,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:

The activity-based costing cost per unit of Product A is closest to:
A) $6.00
B) $9.70
C) $1.50
D) $3.00

Question

Jasmine Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 10,000 units and of Product B is 4,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:

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

The activity-based costing cost per unit of Product A is closest to:
A) $6.00 
B) $9.70 
C) $1.50 
D) $3.00

Quizplus · Accepted Answer

First, we need to allocate the overhead costs to the activity cost pools. Based on the expected activity for each pool, we get the following allocation rates:

Activity 1 = $50,000 / 1,000 machine hours = $50 per machine hour
Activity 2 = $75,000 / 7,500 orders = $10 per order
Activity 3 = $60,000 / 2,000 direct labor hours = $30 per direct labor hour

Next, we can use these rates to allocate the overhead costs to each product.

For Product A:
Activity 1: 3,000 machine hours x $50 = $150,000
Activity 3: 6,000 direct labor hours x $30 = $180,000
Total overhead cost for Product A = $330,000
Cost per unit = $330,000 / 10,000 units = $33 per unit

For Product B:
Activity 2: 2,000 orders x $10 = $20,000
Activity 3: 4,000 direct labor hours x $30 = $120,000
Total overhead cost for Product B = $140,000
Cost per unit = $140,000 / 4,000 units = $35 per unit

Therefore, the activity-based costing cost per unit of Product A is ($33 / unit), or approximately $9.70 per unit. Option B is the closest choice.

Jasmine Company Uses Activity-Based Costing