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:

The unit product cost of Product N4 under the company's traditional costing method in which all overhead is allocated on the basis of direct labor-hours is closest to:

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

Solution. Unit Cost of Product N4 Under Traditional Costing method :

3 * 24.70

(Number of hours per unit * Labour hour rate)

3 * 41.81 (Working Note)

(Number of hours per unit * Overhead Cost per labour hour)

Working Note:

Calculation of Overhead cost per labour hour under Traditional Method of Direct Labour hours

= Total Overhead Cost / Total Direct Labour Hours

= 238,331 / 5,700

= $ 41.81 per Direct Labour hour

Particulars Working Amount($) Direct Costs Material 289.90 Direct Labour

3 * 24.70

(Number of hours per unit * Labour hour rate)

74.10 Total Direct Cost 364.00 Overhead Cost

3 * 41.81 (Working Note)

(Number of hours per unit * Overhead Cost per labour hour)

125.43 Unit Cost Per unit 489.43

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