Waymire Ltd. currently uses a traditional costing system based on direct labour

Question

Waymire Ltd. currently uses a traditional costing system based on direct labour hours to allocate overhead. This year, the company has budgeted to produce 2159 units of one of its products. Each unit requires 3 hours of direct labour.

For the coming year, the company is considering changing to an activity based costing system by allocating overhead based on 3 activities. The following are the activities, budgeted total cost and cost drivers per activity for the upcoming year:

Activity

Cost driver

Cost

Cost Base Volume

Processing

machine hours

$810292

17928

Assembly

direct labour hours

$405734

98745

Inspection

# of inspections

$709593

42704

Waymire Ltd. has estimated the consumption of each of the activities for this product: 1817 machine hours and 3048 inspections.

What is the product’s overhead cost per unit if Waymire continues to allocate overhead using the current costing system?

Select one:

a. $73.82

b. $19.50

c. $58.50

d. $12.33

Activity

Cost driver

Cost

Cost Base Volume

Processing

machine hours

$810292

17928

Assembly

direct labour hours

$405734

98745

Inspection

# of inspections

$709593

42704

Explanation / Answer

Calculate overhead cost per unit if current costing system :

Overhead cost per unit = 2159*3*19.50/2159 = 58.50 per unit

so answer is c) $58.50

Processing 810292 Assembly 405734 Inspection 709593 Total overhead cost 1925619 Total direct labour hour 98745 Labour hour per unit 19.50 per hour

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