ZZZ provides two services: A and B. The annual patient visits are 800 for servic

Question

ZZZ provides two services: A and B. The annual patient visits are 800 for service A and 700 for Service B. ZZZ has traditionally used direct labor hours as the basis for applying all overhead to services. Service A required 0.2 direct labor hours per visit and Service B required 0.6 direct labor hours per visit. ZZZ is considering switching to an activity based costing system computing unit product costs for internal decision making. The new activity based costing system would have three overhead activity cost pools  - Activity 1, Activity 2, and General Factory, with estimated and expected activity as follows: Activity Cost Pool/Estimated Overhead Costs/Service A/Service B/Activity 1/$20,272/300/500/800/Activity 2/$29,380/800/500/1300/General Factory/$21,634/160/420/580/Total $71,286. Determine the overhead cost per unit of Service B under the activity-based costing system

Explanation / Answer

Activity Cost pool Estimated OH cost Service A Service B Total Overhead cost per unit Service B=Estimated OH/Service B activity Activity 1           20,272.00                  300.00                  500.00            800.00                     40.54 Activity 2           29,380.00                  800.00                  500.00         1,300.00                     58.76 General Factory           21,634.00                  160.00                  420.00            580.00                     51.51           71,286.00                   150.81 So overhead cost per unit of service B under ABC costing is $ 150.81

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