Question

Eric Parker has been studying his department’s profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company’s approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,140,000 is based on 40,000 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools.

Cost Pool		Expected Cost				Expected Activities
Product assembly			$	600,000		40,000	Machine hours
Machine setup and calibration				320,000		2,000	setups
Product inspection				90,000		1,500	batches
Raw materials storage				130,000		500,000	pounds
			$	1,140,000

Eric Parker is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department’s four products. He has gathered the following budget information about each product.

Driver Usage		Component 3F5			Component T76
Machine hours		1,000			10,000
Setups		40			20
Batches		20			10
Pounds of raw materials		10,000			10,000

Eric Parker found that the budget included production of 500 units of Component 3F5 and 5,000 units of Component T76.

(a) Calculate the overhead cost per unit of Component 3F5 and Component T76 under traditional costing using machine hours as the overhead application base. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 2 decimal places, e.g. 52.75.)

		Component 3F5		Component T76
Overhead cost per unit		$		$

(b) Calculate the overhead cost per unit of Component 3F5 and Component T76 underactivity-based costing. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 2 decimal places, e.g. 52.75.)

		Component 3F5		Component T76
Overhead per unit		$		$

Answer 1

a) Overhead cost per unit under machine hour bases

	Component 3F5	Component T76
Overhead allocated	28500	285000
Unit	500	5000
Overhead cost per unit	57	57

b) Overhead cost per unit under ABC

	Component 3F5	Component T76
Product assembly	15000	150000
Machine setup and calibration	6400	3200
Product inspection	1200	600
Raw material shortage	2600	2600
Total overhead	25200	156400
unit	500	5000
Overhead cost per unit	50.40	31.28