Question
Problem 7-21 – Comparing traditional and ABC costs
Name:
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:
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]
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.

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