Question

manufactures and sells two products: Product X0 and Product W7. 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 X0	1,000	5	5,000
Product W7	410	3	1,230
Total direct labor-hours			6,230

The direct labor rate is $20.60 per DLH. The direct materials cost per unit is $145.50 for Product X0 and $127 for Product W7.

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 X0	Product W7	Total
Labor-related	DLHs	$	273,078	5,000	1,230	6,230
Production orders	orders		19,048	510	710	1,220
Order size	MHs		241,674	4,010	4,110	8,120
		$	533,800

Which of the following statements concerning the unit product cost of Product W7 is true? (Round your intermediate calculations to 2 decimal places.)

Multiple Choice

The unit product cost of Product W7 under traditional costing is greater than its unit product cost under activity-based costing by $199.81.

The unit product cost of Product W7 under traditional costing is less than its unit product cost under activity-based costing by $37.72.

The unit product cost of Product W7 under traditional costing is greater than its unit product cost under activity-based costing by $37.72.

The unit product cost of Product W7 under traditional costing is less than its unit product cost under activity-based costing by $199.81.

Answer 1

• All working forms part of the answer
• Calculation of Overhead allocated to W7 as per Traditional Method

A	Total Overhead cost	$                                 533,800.00
B	Total direct labor hours	6,230
C = A/B	Overhead cost per DLHs	$                                           85.68
D = C x 1230 DLHs	Allocated to W7	$                                 105,386.40

• Calculation of Overhead allocated to W7 as per ABC Method

	Estimated		Expected Activity
Activity Cost Pools	Activity Measures	Overhead Cost		Product X0	Product W7	Total	Activity Rates
Labor-related	DLHs	$	273,078	5,000	1,230	6,230	$                       43.83
Production orders	orders		19,048	510	710	1,220	$                       15.61
Order size	MHs		241,674	4,010	4,110	8,120	$                       29.76

	Activity Rates	W7 Activities	W7 Overhead cost
Labor-related	$                                           43.83	1,230	$                                     53,910.90
Production orders	$                                           15.61	710	$                                     11,083.10
Order size	$                                           29.76	4,110	$                                   122,313.60
Total Overhead cost allocated			$                                   187,307.60

• Answer calculation

	Total	Per unit
Cost allocated under Traditional Method	$                                 105,386.40	$                        257.04
Cost allocated under ABC	$                                 187,307.60	$                        456.85
Difference	$                                   81,921.20	$                        199.81

--Hence, correct answer = Option #4: The unit product cost of Product W7 under traditional costing is less than its unit product cost under activity-based costing by $199.81