Question
Problem 7-21 – Comparing traditional and ABC costs
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Course:
Date:
Ellis Perry is an electronics components manufacturer.  Information about the company’s two products follows:
AM-2 FM-9
Units produced 15,000 2,000
Direct labor hours required for production 15,000 14,000
Units per batch 3,000 50
Shipping weight per unit 0.5 lbs. 4 lbs.
The company incurs $899,000 in overhead per year and has traditionally applied overhead on the basis of direct labor hours.
Required
a. How much overhead will be allocated to each product using the traditional direct labor hours allocation base?  What overhead cost per unit will be allocated to each product?
Here's one way you could solve this problem:
Overhead Rate = Estimated Overhead = [Figure] = [Formula]
Estimated Cost Driver [Figure]
   AM-2    FM-9
Total overhead to product [Formula] [Formula]
÷ Number of units produced [Figure] [Figure]
= Overhead per unit [Formula] [Formula]
Or solve your own way:
b. Assume that Ellis Perry has identified three activity cost pools.
   Pool     Cost Cost Driver
Assembly $638,000 Direct labor hours
Setup 121,500 Number of setups (1 per batch)
Packaging 139,500 Weight
Given these activity pools and cost drivers, how much overhead should be allocated to each product?  What overhead cost per unit will be allocated to each product?
Solve:
c. Explain the change in overhead costs per unit.
Answer:
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Ellis Perry is an electronics components manufacturer.  Information about the company’s two products follows:
AM-2 FM-9
Units produced 15,000 2,000
Direct labor hours required for production 15,000 14,000
Units per batch 3,000 50
Shipping weight per unit 0.5 lbs. 4 lbs.
Part a
Overhead Rate Estimated Overhead $                                                                                                                                                 899,000 $ 31.00
Estimated Cost Driver                                                                                                                                                        29,000
   AM-2    FM-9
Total overhead to product $                                                       465,000 $                           434,000
Number of units produced 15,000 2,000
Overhead per unit $                                                            31.00 $                             217.00
Part b
Pool Cost Cost Driver Total Activities Per activity Cost
Assembly $                                               638,000 Direct labor hours                                 29,000 $                         22.00
Setup $                                               121,500 Number of setups (1 per batch)                                          45 $                   2,700.00
Packaging $                                               139,500 Weight                                 15,500 $                           9.00
Direct labor hours 14,000+15,000                                                              29,000
Number of setups (1 per batch) (15,000/3,000)+(2,000/50)                                                                      45
Weight (15,000*0.5)+(2,000*4)                                                              15,500
AM-2
Assembly 15,000 DLH × $22/DLH $                                                       330,000
Setup 5 setups × $2,700/setup $                                                         13,500
Packaging: 7,500 pounds × $9/pound $                                                         67,500
Total overhead $                                                       411,000
Number of units produced                                                        15,000.00
Overhead per unit $                                                            27.40
FM-9
Assembly 14,000 DLH × $22/DLH $                                                       308,000
Setup 40 setups × $2,700/setup $                                                       108,000
Packaging: 8,000 pounds × $9/pound $                                                         72,000
Total overhead $                                                       488,000
Number of units produced                                                          2,000.00
Overhead per unit $                                                         244.00
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