Question

A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:

				Budgeted Activity
Activity Cost Pool	Budgeted Cost			Product A1			Product B2
Activity 1	$	49,000			1,300			4,900
Activity 2	$	64,000			2,340			4,860
Activity 3	$	82,000			7,300			900

Annual production and sales level of Product A1 is 8,580 units, and the annual production and sales level of Product B2 is 22,410 units. What is the approximate overhead cost per unit of Product A1 under activity-based costing?

Multiple Choice

• $7.90

• $8.89

• $10.00

• $12.13

• $4.06

Answer 1

The overhead cost of Activity 1 allocated to Product A1

The overhead cost of Activity 1 allocated to Product A1 = Budgeted cost x [Product A1 Activity / Total Activity]

= $49,000 x [1,300 / 6,200]

= $10,274.19

The overhead cost of Activity 2 allocated to Product A1

The overhead cost of Activity 1 allocated to Product A1 = Budgeted cost x [Product A1 Activity / Total Activity]

= $64,000 x [2,340 / 7,200]

= $20,800

The overhead cost of Activity 3 allocated to Product A1

The overhead cost of Activity 3 allocated to Product A1 = Budgeted cost x [Product A1 Activity / Total Activity]

= $82,000 x [7,300 / 8,200]

= $73,000

Total Overhead cost allocated to Product A1 = $10,274.19 + $20,800 + $73,000

= $104,074.19

Therefore, the approximate overhead cost per unit of Product A1 under activity-based costing = Total overhead cost / Annual production and sales level of Product A1

= $104,074.19 / 8,580 units

= $12.13 per unit

“Hence, the approximate overhead cost per unit of Product A1 under activity-based costing will be $12.13”