08 Jun Question Adams Company has two products:
Question
Adams Company has two products: A and B. The annual production and sales of Product A is 1,800 units and of Product B is 1,200 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.5 direct labor-hours per unit and Product B requires 0.8 direct labor-hours per unit. The total estimated overhead for next period is $99,975.
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 General Factory–with estimated overhead costs and expected activity as follows:
Total Estimated
Overhead
Costs Expected Activity
Product A Product B Total
Activity 1 $30,892 1,100 700 1,800
Activity 2 17,596 1,800 300 2,100
General Factory
51,487
900 960 1,860
Total
$99,975
(Note: The General Factory 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:
$43.00$29.62$13.38$13.85
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