Question

Eliezrie, Inc., manufactures and sells two products: Product G8 and Product O0. 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
Product G8	750	5.5	4,125
Product O0	350	2.5	875
Total direct labor-hours			5,000

The direct labor rate is $22.60 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product G8	$118.10
Product O0	$118.50

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

		Estimated		Expected Activity
Activity Cost Pools	Activity Measures	Overhead Cost		Product G8	Product O0	Total
Labor-related	DLHs	$	58,055	4,125	875	5,000
Machine setups	setups		56,890	650	625	1,275
Order size	MHs		368,008	5,050	5,600	10,650
		$	482,953

Which of the following statements concerning the unit product cost of Product G8 is true? (Round your intermediate calculations to 2 decimal places.)

Multiple Choice

• The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $196.09.

• The unit product cost of Product G8 under traditional costing is less than its unit product cost under activity-based costing by $316.17.

• The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $316.17.

• The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $196.09.

Answer 1

Traditional Costing:

Predetermined overhead rate = Estimated overhead cost / Estimated direct labor hours
Predetermined overhead rate = $482,953 / 5,000
Predetermined overhead rate = $96.59 per direct labor hour

Product G8:

Direct labor hours per unit = 5.50

Direct labor cost per unit = Direct labor hours per unit * Direct labor rate per hour
Direct labor cost per unit = 5.50 * $22.60
Direct labor cost per unit = $124.30

Overhead per unit = Predetermined overhead rate * Direct labor hours per unit
Overhead per unit = $96.59 * 5.50
Overhead per unit = $531.25

Unit product cost = Direct materials cost per unit + Direct labor cost per unit + Overhead per unit
Unit product cost = $118.10 + $124.30 + $531.25
Unit product cost = $773.65

Activity Based Costing:

Labor related activity rate = Estimated overhead cost / Estimated activity
Labor related activity rate = $58,055 / 5,000
Labor related activity rate = $11.61 per direct labor hour

Machine setups activity rate = Estimated overhead cost / Estimated activity
Machine setups activity rate = $56,890 / 1,275
Machine setups activity rate = $44.62 per setup

Order size activity rate = Estimated overhead cost / Estimated activity
Order size activity rate = $368,008 / 10,650
Order size activity rate = $34.55 per machine hour

Product G8:

Total overhead = $11.61 * 4,125 + $44.62 * 650 + $34.55 * 5,050
Total overhead = $251,371.75

Overhead per unit = Total overhead / Units produced
Overhead per unit = $251,371.75 / 750
Overhead per unit = $335.16

Direct labor hours per unit = 5.50

Direct labor cost per unit = Direct labor hours per unit * Direct labor rate per hour
Direct labor cost per unit = 5.50 * $22.60
Direct labor cost per unit = $124.30

Unit product cost = Direct materials cost per unit + Direct labor cost per unit + Overhead per unit
Unit product cost = $118.10 + $124.30 + $335.16
Unit product cost = $577.56

Difference in unit product cost = $773.65 - $577.56
Difference in unit product cost = $196.09

Correct Option:
The unit product cost of Product G8 under traditional costing is greater than its unit product cost under activity-based costing by $196.09.