Question

Fleurant, Inc., manufactures and sells two products: Product W2 and Product P8. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:

	Expected Production	Direct Labor-Hours Per Unit	Total Direct Labor-Hours
Product W2	300	6	1,800
Product P8	600	3	1,800
Total direct labor-hours			3,600

The direct labor rate is $35.10 per DLH. The direct materials cost per unit is $201.60 for Product W2 and $138.30 for Product P8.

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

		Estimated		Expected Activity
Activity Cost Pools	Activity Measures	Overhead Cost		Product W2	Product P8	Total
Labor-related	DLHs	$	216,576	1,800	1,800	3,600
Production orders	orders		18,338	300	360	660
Order size	MHs		233,086	3,860	3,660	7,520
		$	468,000

Which of the following statements concerning the unit product cost of Product W2 is true?

Multiple Choice

A) The unit product cost of Product W2 under traditional costing is greater than its unit product cost under activity-based costing by $7.61.

B) The unit product cost of Product W2 under traditional costing is greater than its unit product cost under activity-based costing by $260.00.

C.) The unit product cost of Product W2 under traditional costing is less than its unit product cost under activity-based costing by $260.00.

D.) The unit product cost of Product W2 under traditional costing is less than its unit product cost under activity-based costing by $7.61.

Answer 1

Solution :

The Answer is (D) The unit product cost of Product W2 under traditional costing is less than its unit product cost under activity-based costing by $7.61.

Working :

Step 1 : Product W2 Unit Cost under Traditional Costing -

Direct Material per Unit	$ 201.60
Direct Labor pr Unit (6 Hour * $ 35.10)	$ 210.60
Overhead per Unit (6 Hour * $ 130)	$ 780
Unit Cost	$ 1,192.20

OH Rate per Hour = Total Overhead / Total Labor Hour

= $ 468,000 / 3,600

= $ 130

Step 2 : Product W2 Unit Cost under ABC Costing -

Direct Material per Unit	$ 201.60
Direct Labor pr Unit (6 Hour * $ 35.10)	$ 210.60
Overhead per Unit	$ 787.61
Unit Cost	$ 1,199.81

OH rate per Unit for Product W2 :

Labor Related ($ 216,576 / 3,600) * 1,800	$ 108,288
Production Order ($ 18,338 / 660) * 300	$ 8,334
Order Size ($ 233,086 / 7,520) * 3,860	$ 119,660
Total Overhead	$ 236,282
Units Produced	300
OH per Unit	787.61

Step 3

Unit Cost as per Traditional Method	$ 1,192.2
Unit Cost as per ABC Method	$ 1,199.81
Excess Unit Cost in ABC	7.61

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