Question

Problem 7A-1 Activity-Based Costing Product Costs for External Reports [LO6]

Data concerning Cranur Architects Corporation’s two major business lines are given below:

	Commercial			Residential
Direct materials per square metre	$	5.00		$	3.50
Direct labour per square metre	$	47		$	35.25
Direct labour-hours per square metre		0.1	DLHs		0.075	DLHs
Estimated annual output		80,000	m2		560,000	m2

The company has a traditional costing system in which architecture department overhead is applied to units (square metres of architectural drawings) based on direct labour-hours. Data concerning architecture department overhead and direct labour-hours for the upcoming year appear below:

Estimated total architecture department overhead	$	1,340,000
Estimated total direct labour-hours		50,000	DLHs

Required:

1. Determine the unit costs of the Commercial and Residential products under the company’s traditional costing system. (Round your answers to 2 decimal places.)

2. The company is considering replacing its traditional costing system for determining unit product costs for external reports with an ABC system. The ABC system would have the following three activity cost pools:

				Expected Activity
	Estimated
Activities and Activity Measures	Overhead Cost			Commercial			Residential			Total
Supporting direct labour (direct labour-hours)	$	1,200,000			8,000			42,000			50,000
Drawing software modifications (changes)		120,000			200			50			250
Quality review and technical checks (tests)		20,000			160			40			200
Total service department overhead cost	$	1,340,000

Determine the unit costs (cost per square metre of architectural drawings) of the Commercial and Residential lines of business under the ABC system. (Round your answers to 2 decimal places.)

Answer 1

1) Predetermine overhead rate = 1340000/50000 = 26.80 per labor hour

Calculate unit cost

	Commercial	Residential
Direct material	5	3.50
Direct labor	47	35.25
Overhead	26.80*.10 = 2.68	26.8*.075 =2.01
Unit cost	54.68	40.76

2) Calculate unit cost Under ABC

	Commercial	Residential
Supporting Direct labor	192000	1008000
Drawing software modification	96000	24000
Quality review and technical checks	16000	4000
Total overhead	304000	1036000
Unit	80000	560000
Overhead cost per unit	3.80	1.85
Direct material	5	3.50
Direct labor	47	35.250
Unit product cost	55.80	40.60