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	$	117,500		Number of units produced
Programming cost		150,500		Number of programming hours
Software inspections		20,000		Number of inspections
Product testing		24,000		Number of tests
Total overhead cost	$	312,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		14,100			2,000			304			1,680
Decoder Q		32,900			1,500			96			1,320
Total		47,000			3,500			400			3,000

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		7,800
Decoder Q		18,200
Total		26,000

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

Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC. (Round intermediate calculations and final answers to 2 decimal places.)

	Cost per unit Method Decoder P Decoder Q ABC Labor hours 6.64 6.64

Answer 1

1. Computation of cost of Over head to Each product
	Decorder P		Decorder Q	Total
Predetermined overhead rate (a)	$12.00		$12.00
Labour hours (b)	7,800		18,200	26,000
	(112000*0.025)		(1200*0.025)
Manufacturing overheads (c=aXb)	$93,600.00		$218,400.00	$312,000.00
No. of Unit c/d)	14,100		32,900
Cost overhead per Unit (c/d)	$6.64		$6.64

2. Computation Cost of Overhead per Unit as per ABC
					Decorder P		Decorder Q
ABC system	Estimated cost (a)		Cost driver (b)	Cost per driver (c=a/b)	No. of Driver (d)	Allocated OH (cXd)	No. of Driver ( e)	Allocated OH (c X e)
Repair & Maintainance cost	$117,500.00	No . Of Unit	47,000	$2.50	14100	$35,250.00	32900	$82,250.00
Programming Cost	$150,500.00	No. of Prog Hour	3,500	$43.00	2000	$86,000.00	1500	$64,500.00
Software Inspection	$20,000.00	No. of Inspection	400	$50.00	304	$15,200.00	96	$4,800.00
Product Testing	$24,000.00	No. of test	3,000	$8.00	1680	$13,440.00	1320	$10,560.00
Total (i)	$312,000.00					$149,890.00		$162,110.00
Number of Units (ii)						14,100		32,900
Cost / Unit (i/ii)						$10.63		$4.93