Question

Lillich, Inc., manufactures and sells two products: Product U6 and Product R5. 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 U6	710	9.1	6,461
Product R5	1,090	6.1	6,649
Total direct labor-hours			13,110

The direct labor rate is $27.20 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product U6	$250.00
Product R5	$167.40

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 U6	Product R5	Total
Labor-related	DLHs	$	199,638	6,461	6,649	13,110
Production orders	orders		70,840	1,150	1,050	2,200
Order size	MHs		1,018,608	6,100	6,400	12,500
		$	1,289,086

Which of the following statements concerning the unit product cost of Product U6 is true? (Round your intermediate calculations to 2 decimal places.)

rev: 03_25_2018_QC_CS-119201

Multiple Choice

• The unit product cost of Product U6 under traditional costing is less than its unit product cost under activity-based costing by $348.33.

• The unit product cost of Product U6 under traditional costing is less than its unit product cost under activity-based costing by $3.93.

• The unit product cost of Product U6 under traditional costing is greater than its unit product cost under activity-based costing by $3.93.

• The unit product cost of Product U6 under traditional costing is greater than its unit product cost under activity-based costing by $348.33.

Answer 1

Sol: Before going to solution let us understand about traditional costing and activity-based costing Traditional Costing: Allocates cost of Overhead cost to units based on direct labour hours Activity-based costing: Allocates cost of Overhead cost to units based on Cost drivers Now let us calculatecost under Different methods 1. Cost Per Unit - Tradition Costing Method Product U6 Per unit Cost 710 6461 Product R5 Per unit Cost 1090 6649 | 250.00 $ 177,500 $ 167.40 $ 182,466 Particulars Productions Cost (A) Direct Labour Hours-(B) Cost Direct Material Cost Direct Labour Cost (27.20Per Hour*9.1hours(U6)), (27.20Per Hour*6.1hours(R5)) Overheads (Note 1) - (B)*(C) Total Cost of Product- (D) Cost Per Unit $ 247.52 $ 165.92 $ $ $ $ 175,739 635,310 988,549 1,392.32 $ 180,853 $ 653,796 $ 1,017,115 $ 933.13 Note 1 Total Overhead Cost - Provided in question Total Direct Labour Hours-Provided in question Overhead Obsorption rate Per Hour (A) 1,289,086 13,110 98.33 $

2. Cost Per Unit - Activity Based Costing Method Product U6 Particulars Per unit Cost Productions Cost (A) 710 Direct Labour Hours-(B) 6461 Product R5 Per unit Cost 1090 6649 177,500 $ 167.40 $ 182,466 $ 165.92 $ 180,853 s Cost Direct Material Cost $ 250.00 $ Direct Labour Cost (27.20Per Hour*9.1hours(U6)), (27.20Per $ 247.52 $ Overheads allocated based on activity $ -Labor-related $ -Production orders $ -Order size $ Total Cost of Product- (D) $ Cost Per Unit-(D)/(A) $ 175,739 - 98,401 37,030 497,089 985,759 1,388.39 $ $ $ $ $ 101,264 33,810 521,536 1,019,929 935.71

Note 2 Allocation of Overheads Product 16 Product R5 (E)*(B) (E)*(C) Activity Measures Activity Cost Pools Labor-related Production orders Order size DLHS orders MHS Overhead Cost (A) | $ 199,638 $ 70,840 $ 1,018,608 Product 16 (B) 6,461 1,150 6,100 Product R5 (C) 6 ,649 1,050 6,400 Total Cost Per Unit Cost of Cost Driver Pool (D) (E)=(A) / (D) 13,110 $ 15.230 2,200 $ 32.200 12,500 $ 81.49 98,401 37,030 497,089 101,264 33,810 521,536 Cost Per Unit Comparison Particulars Product U6 Product R5 Traditional Costing Method $ 1,392.32 $ 933.13 Activity Based Costing Method $ 1,388.39 $ 935.71 Difference $ 3.93 $ (2.58) Cost per unit of Product U6 under Traditional Method is more than Activity Based Method By $3.93

True False FALSE Multiple Choice The unit product cost of Product U6 under traditional costing is less than its unit product cost under activity-based costing by $348.33. The unit product cost of Product U6 under traditional costing is less than its unit product cost under activity-based costing by $3.93. The unit product cost of Product U6 under traditional costing is greater than its unit product cost under activity-based costing by $3.93. The unit product cost of Product U6 under traditional costing is greater than its unit product cost under activity-based costing by $348.33. FALSE TRUE FALSE