Adams Company has two products: A and B. The annual production and sales of Prod
ID: 2417349 • Letter: A
Question
Adams Company has two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 900 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.5 direct labor-hours per unit. The total estimated overhead for next period is $67,522.
The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:
Estimated
Activity Overhead Expected Activity
Cost Pool Costs Product A Product B Total
Activity 1 $ 6,915 300 200 500
Activity 2 24,948 2,100 700 2,800
General Factory 35,659 200 450 650
Total $67,522
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
The overhead cost per unit of Product A under the activity-based costing system is closest to:
$67.66.
$21.94.
$48.23.
$41.55.
The application rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:
$23.05.
$13.83.
$34.58.
$135.04.
$67.66.
$21.94.
$48.23.
$41.55.
The application rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:
$23.05.
$13.83.
$34.58.
$135.04.
Explanation / Answer
Overhead cost per unit for product A
Activity 1 6915/500*300 = $4,149
Activity 2 24,948/2,800 *2,100 = 18,711
Activity 3 35,659/650 *200 = 10,972
total costs = $33,832
Cost per unit = $33,832 / 500 = $67.664 or 67.66
2) Activity 1 rate = 6915/500 = $13.83 per unit
Overhead cost per unit for product A
Activity 1 6915/500*300 = $4,149
Activity 2 24,948/2,800 *2,100 = 18,711
Activity 3 35,659/650 *200 = 10,972
total costs = $33,832
Cost per unit = $33,832 / 500 = $67.664 or 67.66
2) Activity 1 rate = 6915/500 = $13.83 per unit
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