Question

Adelberg Company has two products: A and B. The annual production and sales of Product A is 1,850 units and of Product B is 1,250 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $100,500.

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 Order Size--with estimated overhead costs and expected activity as follows:

	Estimated		Expected Activity
Activity Cost Pools	Overhead Costs		Product A	Product B	Total
Activity 1	$	31,055	1,150	750	1,900
Activity 2		17,688	1,850	350	2,200
Order Size		51,757	555	750	1,305
Total	$	100,500

(Note: The Order Size 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:

Answer 1

Answer

• Total Direct Labor hours estimated
  = (1850 units x 0.3 DLHs) + (1250 units x 0.6 DLHs)
  = 555 + 750
  = 1305 DLHs
• Total estimated overhead = $ 100,500
• Using Traditional Costing, Overhead allocation rate
  = $ 100500 / 1305
  = $ 77.01
• The Overhead cost per unit of Product B
  = 0.6 DLH x $ 77.01
  = $ 46.21
• Correct Answer = Closest to $ 46.21 per unit