Question

Fmaedi698, 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	750	5.5	4,125
Product O0	350	2.5	875
Total direct labor-hours			5,000

The direct labor rate is $22.60 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product G8	$118.10
Product O0	$118.50

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	$	58,055	4,125	875	5,000
Machine setups	setups		56,890	650	625	1,275
Order size	MHs		368,008	5,050	5,600	10,650
		$	482,953

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

a. The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $316.17.

b. The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $196.09.

c. The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $196.09.

d. The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $316.17.

Answer 1

Answer:

b. The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $196.09

Calculations:

i) Under Activity based Costing:

	Overhead Cost		Base	=	Activity Rate
Labor-related	$ 58,055	/	5,000	=	$ 11.61	per DLH
Machine setups	$ 56,890	/	1,275	=	$ 44.62	per Setups
Order size	$ 368,008	/	10,650	=	$ 34.55	per MHS

Product G8
Allocation of Overhead cost
	Base	x	Activity Rate	=	Total cost
Labor-related	4125	x	$ 11.61	=	$ 47,891.25
Machine setups	650	x	$ 44.62	=	$ 29,003.00
Order size	5050	x	$ 34.55	=	$ 174,477.50
Total					$ 251,371.75
÷ Expected production in units					750
= Overhead cost per unit under ABC Costing					$ 335.16

Total unit cost:

Product G8
Direct material per unit	$ 118.10
Direct labor per unit	$ 22.60
Overhead per unit	$ 335.16
Total cost per unit	$ 475.86

.

ii) Under Traditional Costing:

Overhead rate = $482,953 ÷ 5,000 direct labor hours = $96.59

Product G8
Overhead allocated [4,125 x $96.59]	$ 398,434
÷ Estimated production	750
= Overhead rate per unit	$ 531.25

.

Product G8
Direct material per unit	$ 118.10
Direct labor per unit	$ 22.60
Overhead per unit	$ 531.25
Total cost per unit	$ 671.95

iii) Difference:

Total cost per unit under Trading costing	$ 671.95
Total cost per unit under ABC Costing	$ 335.16
Difference	$ 336.79

Therefore, The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $196.09