Question

Rosman, Inc., manufactures and sells two products: Product Q1 and Product G2. The company currently uses a plantwide predetermined overhead rate based on direct labor-hours. 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 Q1	720	13.2	3,960
Product G2	820	10.2	3,240
Total direct labor-hours			7,200

   

The direct labor rate is $28.00 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product Q1	$294.60
Product G2	$187.80

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 Q1	Product G2	Total
Labor-related	DLHs	$105,156	3,960	3,240	7,200
Product testing	Tests	78,008	1,230	1,640	2,870
General factory	MHs	405,000	6,000	5,280	11,280
		$588,164

Required:

Calculate the difference between the unit product costs under the traditional costing method and the activity-based costing system for each of the two products. (Round your intermediate calculations and final answers to 2 decimal places. Enter your answers as positive values.)

Answer 1

Predetermined overhead cost under traditional cost = Overhead ÷ Total Direct labor hours
	588164 / 7200
	$                      81.69	per DLH
				Hint
Cost under traditional system				Cost under traditional system
	Product Q1	product Q2			Product Q1	product Q2
Expected Production	720	820		Expected Production	720	820
Total Direct material	$            212,112.00	$                         153,996.00		Total Direct material	(720 x 294.60)	(720 x 187.80)
Direct Labor	110,880.00	90,720.00		Direct Labor	(3960 x 28)	(3240 x 28)
Overhead	323,490.20	264,673.80		Overhead	(3960 x 81.69)	(3240 x 81.69)
Total Product Cost	$            646,482.20	$                         509,389.80		Total Product Cost	$     646,482.20	$ 509,389.80
÷ No of units	÷ 720	÷ 820		÷ No of units	÷ 720	÷ 820
Per units cost	$                    897.89	$                                  621.21		Per units cost	$             897.89	$          621.21
		Estimated	Expected Activity			Activity rate
		A			B	C = A÷ B
Activity Cost Pools	Activity Measures	Overhead Cost	Product Q1	Product G2	Total
Labor-related	DLHs	$                                  105,156	3,960	3,240	7,200	$            14.61
Product testing	Tests	78,008	1,230	1,640	2,870	$            27.18
General factory	MHs	405,000	6,000	5,280	11,280	$            35.90
		$                                  588,164
Overhead assigned as per ABC rates
Product Q1	Rate x	No. of driver units =	Amount
Labor-related	$                      14.61	3960	$                      57,835.80
Product testing	$                      27.18	1230	$                      33,432.00
General factory	$                      35.90	6000	$                    215,425.53
			$                    306,693.33
Product G2	Rate x	No. of driver units =	Amount
Labor-related	$                      14.61	3240	$                      47,320.20
Product testing	$                      27.18	1640	$                      44,576.00
General factory	$                      35.90	5280	$                    189,574.47
			$                    281,470.67
Cost under ABC system
	Product Q1	product Q2
Expected Production	720	820
Total Direct material	$            212,112.00	$                         153,996.00
Direct Labor	110,880.00	90,720.00
Overhead	306,693.33	281,470.67
Total Product Cost	$            629,685.33	$                         526,186.67
÷ No of units	÷ 720	÷ 820
Per units cost	$                    874.56	$                                  641.69
	Product Q1	product Q2
ABC per unit cost	$                    874.56	$                                  641.69
Traditional per unit cost	$                    897.89	$                                  621.21
Difference	$                    (23.33)	$                                    20.48