7. Adams Company has two products: A and B. The annual production and sales of P

Question

7. Adams Company has two products: A and B. The annual production and sales of Product A Is 1,950 units and of Product B Is 1.350 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.5 direct labor-hours per unit and Product B requires 0.8 direct labor-hours per unit The total estmated overhead for next period is $101600 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 Overhead Expected Activity Product B Total Product A 250 1,950 975 Total 2.100 2.400 2,055 Costs Ac Activity 2 General Factor $31,394 17.882 52.324 $101,600 850 450 1080 (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 B under the traditional costing system is closest to: O $39.55 O $12.75 O $14 08 O $26.80

Explanation / Answer

A B Total Units 1950 1350 Direct-labor hours per unit 0.5 0.8 Total direct labor hours 975 1080 2055 Predetermined overhead rate=101600/2055= 49.440 Overhead cost per unit of Product B=0.8*49.440= 39.55 Option 1 is correct

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