The company is considering using an activity-based costing system to compute uni
ID: 2443335 • Letter: T
Question
The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below.
Estimated
Activity
Overhead
Expected Activity
Cost Pool
Costs
Product C
Product D
Total
Machine setups
$ 13,630
130
160
290
Purchase orders
85,750
750
1,000
1,750
General factory
67,760
4,000
2,160
6,160
$167,140
Determine the unit product cost of each product for the current period using the activity-based costing approach.
Estimated
Activity
Overhead
Expected Activity
Cost Pool
Costs
Product C
Product D
Total
Machine setups
$ 13,630
130
160
290
Purchase orders
85,750
750
1,000
1,750
General factory
67,760
4,000
2,160
6,160
$167,140
Explanation / Answer
Pre-determined overhead rate
Pre-determined overhead rate = Total Estimated overhead / Total Expected Activity
Machine setups = $13,630 / 290 Machine set ups = $47 per machine set ups
Purchase orders = $85,750 / 1750 Purchase orders = $49 per purchase order
General Factory = $67,760 / 6,160 = $11 per general factory
Unit product cost, PRODUCT - C
= [130 x $47] + [750 x $49] + [4000 x $11]
= $6,110 + 36,750 + 44,000
= $86,860
Unit product cost, PRODUCT - D
= [160 x $47] + [1,000 x $49] + [2,160 x $11]
= $ 7,520 + 49,000 + 23,760
= $ 80,280