The nex ghres questions are hased on the following A company is considering swit

Question

The nex ghres questions are hased on the following A company is considering switching to an activity-based costing (ABC) system. The company produces and sells two products: Basic and Pro. The production of the Pro products requires more expensive materials and more experienced workers. The company consists of two departments: Production (where all manufacturing activities are taken) and Marketing (which engages in selling and admin activity only). The company's tradirional costing system computes unit product costs as dictated by GAAP: direct labor cost (DLC) is used as the allocation base for manufacturing overhead cost (the overhcad rate is rounded to the nearest cent). The ABC system will include in unit costs all costs casily associated with units. In addition, in the ABC system, there are four major indirect activities: Machine Setups, Special Processing, Faciory Supervision, and Customer Relations In the ABC system, Custiomer Relations costs will be associated with customers; the rest of the costs will be associated with units of the two products 9% of Customer Relations cost relates to manufacturing and is incurred in the Production Department; the rest ofthe Customer Relations cost is incurred in the Marketing Department. The pries diret matcrial cos (DM shiping cost and DI.Hs helow are gihen for one unit of the prodtact wage-DL- Cost- Hourly Shipping Price DM DLHs Units 6000 4000 6500 $150 $250-L $60 S10 S15 Pro S2 The company collected the data for ABC as follows o timated Activity mcasures used Activity Cost Pool Act vof Measure .- OH cost 360,000 S 135,000 s 225,000 5 200,000 AC 2250 Basic Pro -8a40-To:16o. Machine Setup Special Processing Factory Supervision Cusoemer Relatioes (on 5 customers) ?60000- s of sctups Machinc hours DLC t of customers 40.-120 ; 160 , 8,000 12,000 22o poo Wha is the difterence between the Pro prodact's unit costs computed by the traditional and ABC systems? t inder the traditional costing system, the unit cost of the Pro product is lower by B, Under the traditional costing system, the unit cost of the Pro product is higher by C. Under the traditional costing system, the unit cost of the Pro product is lower by s 225 per unit s 2.25 per wnit. 5 4.25 per unit 5 4.25 per unit D. Uader the traditional costing syscm, the unit cost of the Pro product is higher by None of the above 5 4.25 ad

Explanation / Answer

Direct labor cost Basic 60000 (6000*10*1) pro 120000 (4000*15*2) Total direct labor cost 180000 Amount Cost driver per unit Machine setups 360000 160 2250 Special processing 135000 20000 6.75 Factory supervision 225000 180000 1.25 720000 Cost driver Pro Total amount Machine setups 2250 120 270000 Special processing 6.75 12000 81000 Factory supervision 1.25 120000 150000 Total 497000 Units 4000 Per unit cost 124.25 Total overheads cost 720000 Total direct labor cost 180000 overhead cost per direct labor cost 4 Pro Direct labor cost 120000 overhead cost per direct labor cost 4 Total overheads 480000 Units 4000 Per unit cost 120 Correct answer is C 4.25 Lower

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