Question

Fmaedi156, Inc., manufactures and sells two products: Product G8 and Product O0. Historically, the firm has used a traditional costing system, with direct labor hours as an activity base, to allocated manufaturing overhead to products. 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 G8	820	6.2	5,084
Product O0	420	3.2	1,344
Total direct labor-hours			6,428

The direct labor rate is $23.30 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product G8	$125.10
Product O0	$125.50

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 G8	Product O0	Total
Labor-related	DLHs	$	61,555	5,084	1,344	6,428
Machine setups	setups		60,390	1,000	660	1,660
Order size	MHs		371,508	5,400	6,300	11,700
		$	493,453

Which of the following statements concerning the unit product cost of Product G8 is true? (Round your intermediate calculations to 2 decimal places.)

rev: 03_25_2018_QC_CS-119201

Multiple Choice

• The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $163.12.

• The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $283.20.

• The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $163.12.

• The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $283.20.

Answer 1

Total overhead	$        493,453
Total direct labour hours	6428
Overhead/labour hour	$            76.77
Cost of G8 product under traditional costing system:
Direct material	$          125.10
Direct labour (6.2 * 23.30)	$          144.46
overhead (6.2 hrs * 76.77)	$          475.97
	$          745.53
Activity based costing:
	i	ii	iii= I / ii	iv
Activity pool	Total cost	expected activity	Activity Rate	G8 total activity	Total overhead cost for G8
Labour related	$          61,555	6428	$       9.58	5084	$    48,685
Machine related	$          60,390	1660	$    36.38	1000	$    36,380
order size	$        371,508	11700	$    31.75	5400	$ 171,465
	$        493,453				$ 256,530
				Expected production	820
				overhead cost / G8 unit	$    312.84
Cost of G8 product under acivity based costing:
Direct material	$          125.10
Direct labour (6.2 * 23.30)	$          144.46
Overhead rate per product	$          312.84
	$          582.40
Increase in cost of product G8 in activity costing compared to traditional costing = 745.53 - 582.40 = $ 163.12
The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $163.12