Question

Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools	Cost Pool Total			Cost Driver
Repair and maintenance on assembly machine	$	104,500		Number of units produced
Programming cost		143,500		Number of programming hours
Software inspections		14,000		Number of inspections
Product testing		18,000		Number of tests
Total overhead cost	$	280,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		16,500			1,500			304			2,240
Decoder Q		38,500			1,000			96			1,760
Total		55,000			2,500			400			4,000

Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow:

	Direct Labor Hours
Decoder P		6,000
Decoder Q		14,000
Total		20,000

Required

Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Answer 1

1)	When using direct labor hours
	overhead rate = estimated moh/estimated direct labor hours
			280,000/20,000
			14
	overhead allocated = overhead rate * direct labor hours of respective product
				DecoderP	Decoder Q
	Direct labor hours			6,000	14,000
	overhead rate			14	14
	overhead allocated			84000	196000
	units produced			16,500	38,500
	overhead unit cost			5.09	5.09	answer
2)	When using ABC		cost	cost	oh rate
			(a)	driver b	c=a/b
	Activity pools
	Repair & Maintenance		104,500	55,000	1.9	per unit
	Programming cost		143,500	2,500	57.4	per hour
	Software inspections		14,000	400	35	per inspection
	product testing		18,000	4,000	4.5	per test
	total		280,000
				DecoderP	Decoder Q
	Activity pools
	Repair & Maintenance			31350	73150
	Programming cost			86100	57400
	Software inspections			10640	3360
	product testing			10080	7920
	total			138170	141830
	units produced			16,500	38,500
	overhead unit cost			8.37	3.68	answer