Question

Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

Activity Cost Pool	Activity Measure			Estimated Activity	Estimated Overhead Cost
Machine Setups	Number of setups			400	$	150,000
Quality Control	Number of inspections			1,500	$	180,000
Other Overhead	Machine hours			30,000	$	480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

	Model #19			Model #36			Model #58
Direct material cost	$	400		$	540		$	310
Direct labor cost	$	810		$	600		$	220
Number of setups		2			3			1
Number of inspections		1			3			1
Number of machine hours		4			8			10

In comparing the traditional system with the activity-based costing system, which of Njombe's Models had higher unit product costs under the traditional system?

Multiple Choice

• #19

• #19 and #58

• #58

• #36 and #58

Answer 1

Answer: A - Model 19

Unit Product cost under Traditional costing method

Pre-determined overhead rate is 150% of Direct Labor cost

So, the Overhead allocated to Model 19 (Per Unit)

= Direct Labor cost * Pre-determined overhead rate = $810 *150% = $1,215

So, the Overhead allocated to Model 36 (Per Unit)

= Direct Labor cost * Pre-determined overhead rate = $600 *150% = $900

So, the Overhead allocated to Model 58 (Per Unit)

= Direct Labor cost * Pre-determined overhead rate = $220 *150% = $330

Unit Product cost under Activity based costing method

In Traditional system Model 19 has unit product cost of $2,425 but in ABC system it has Unit product cost of $2,144 only.

Remaining two model's unit cost is higher in ABC system than in Traditional system

Only Model 19 has higher Unit product cost in Traditional sysytem than in ABC system.