Question

2. (20 Points) Nelson, Inc., manufactures and sells two products: Product S3 and Product K2. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: Expected Production Direct Labor-Hours Per Unit Total Direct Labor-Hours 6,400 8.0 Product S3 Product K2 Total direct labor-hours 800 900 6.0 400 The direct labor rate is $18.00 per DLH. The direct materials cost per unit for each product is given below: Direct Materials Cost per Unit $280.70 157.90 Product S3 Product K2 The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

Answer 1

Solution a:

Predetermined overhead rate under traditional method = Total overhead cost / Total Labor hours

= $1050899 / 11800 = $89.0592 = $89.06

Overhead Allocation to Product and Overhead per unit- Traditional allocation method
Particulars	Product S3	Product K2
Direct labor Hours	6400	5400
Overhead rate	$89.06	$89.06
Allocated overhead	$569,984.00	$480,924.00
production units	800	900
Overhead cost per unit	$712.48	$534.36

Computation of Product cost per unit Using Traditional method
Particulars	Product S3	Product K2
Direct material per unit	$280.70	$157.90
Direct labor per unit	$144.00	$108.00
Overhead per unit	$712.48	$534.36
Unit Product Cost	$1,137.18	$800.26

Solution b:

Allocation of overhead to product and computation of overhead cost per unit (ABC System)
Activity cost pool	cost driver	Estimated overhead cost	Expected cost drivers	Activity rate of activity cost pool	Product S3		Product K2
					Expected activity	Allocated overhead	Expected activity	Allocated overhead
Labor related	DLHs	$523,094.00	11800	$44.33	6400	$283,712.00	5400	$239,382.00
machine setups	Setups	$135,478.00	1400	$96.77	600	$58,062.00	800	$77,416.00
General factory	MHs	$392,327.00	10300	$38.09	5000	$190,450.00	5300	$201,877.00
Total		$1,050,899.00				$532,224.00		$518,675.00
Total units						800		900
Overhead cost per unit						$665.28		$576.31

Computation of Product cost per unit Using ABC Costing method
Particulars	Product S3	Product K2
Direct material per unit	$280.70	$157.90
Direct labor per unit	$144.00	$108.00
Overhead per unit	$665.28	$576.31
Unit Product Cost	$1,089.98	$842.21

Answer 2

Solution a:

Predetermined overhead rate under traditional method = Total overhead cost / Total Labor hours

= $1050899 / 11800 = $89.0592 = $89.06

Overhead Allocation to Product and Overhead per unit- Traditional allocation method
Particulars	Product S3	Product K2
Direct labor Hours	6400	5400
Overhead rate	$89.06	$89.06
Allocated overhead	$569,984.00	$480,924.00
production units	800	900
Overhead cost per unit	$712.48	$534.36

Computation of Product cost per unit Using Traditional method
Particulars	Product S3	Product K2
Direct material per unit	$280.70	$157.90
Direct labor per unit	$144.00	$108.00
Overhead per unit	$712.48	$534.36
Unit Product Cost	$1,137.18	$800.26

Solution b:

Allocation of overhead to product and computation of overhead cost per unit (ABC System)
Activity cost pool	cost driver	Estimated overhead cost	Expected cost drivers	Activity rate of activity cost pool	Product S3		Product K2
					Expected activity	Allocated overhead	Expected activity	Allocated overhead
Labor related	DLHs	$523,094.00	11800	$44.33	6400	$283,712.00	5400	$239,382.00
machine setups	Setups	$135,478.00	1400	$96.77	600	$58,062.00	800	$77,416.00
General factory	MHs	$392,327.00	10300	$38.09	5000	$190,450.00	5300	$201,877.00
Total		$1,050,899.00				$532,224.00		$518,675.00
Total units						800		900
Overhead cost per unit						$665.28		$576.31

Computation of Product cost per unit Using ABC Costing method
Particulars	Product S3	Product K2
Direct material per unit	$280.70	$157.90
Direct labor per unit	$144.00	$108.00
Overhead per unit	$665.28	$576.31
Unit Product Cost	$1,089.98	$842.21