Serva, Inc., manufactures and sells two products: Product R4 and Product N4. Dat

Question

Serva, Inc., manufactures and sells two products: Product R4 and Product N4. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:

The direct labor rate is $24.70 per DLH. The direct materials cost per unit for each product is given below:

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

Which of the following statements concerning the unit product cost of Product N4 is true?

Question options:

The unit product cost of Product N4 under traditional costing is greater than its unit product under activity-based costing by $116.07.

The unit product cost of Product N4 under traditional costing is less than its unit product cost under activity-based costing by $116.07.

The unit product cost of Product N4 under traditional costing is greater than its unit product under activity-based costing by $175.65.

The unit product cost of Product N4 under traditional costing is less than its unit product cost under activity-based costing by $175.65.

Expected Production Direct Labor-Hours Per Unit Total Direct Labor-Hours Product R4 800 6.0 4,800 Product N4 300 3.0     900 Total direct labor-hours 5,700

Explanation / Answer

Overhead allocation to product N4 using activity based costing :

Labor related =   86811 * 900/ 5700 = 13707

Machine set up = 29000 * 600 /1000 = 17400

General factory = 122520 *2900 /6000 = 59218

Total overhead allocated = 90325

Per unit overhead cost = 90325 / 300 = 301.08

Allocation of overhead under traditiona; costing = 238331 * 900/5700 = 37631.21

Per unit = 37631.21 / 300= 125.43

Correct option is "D" -The unit product cost of Product N4 under traditional costing is less than its unit product cost under activity-based costing by $175.65.

[301.08 - 125.43 = 175.65]

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