Question

Howden, Inc., manufactures and sells two products: Product P5 and Product 59. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: 7.0 Expected Direct Labor Total Direct Production Hours Per Unit Labor Hours Product P5 300 2,100 Product S9 900 4.0 3,600 Total direct labor hours 5,700 The direct labor rate is $25.70 per DLH. The direct materials cost per unit for each product is given below: Direct Materials Cost per Unit Product P5 $248.50 Product S9 $294.80 The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: Estimated Expected Activity Overhead Activity Cost Pools Activity Measures Cost Product P5 Product S9 Total Laborrelated DLHS $ 247152 2.100 3,600 5.700 Machine setups setups 28,990 600 700 1,300 Order size MHs 519,241 4,900 5.200 10,100 $ 795,383 Which of the following statements concerning the unit product cost of Product S9 is true? (Round your intermediate calculations to 2 decimal places.)

Answer 1

Solution:

The correct option is 'c'.

Explanation:

Traditional costing:

Predetermined overhead rate = Estimated overhead costs /Estimated direct labor hours

=

Estimated overhead cost	$795,383
Total direct labor hours	5,700
Traditional costing overhead rate	$139.54 ($795,383 / 5700 hours)
Product S9 overhead per unit	$558.16 ($139.54 × 4.0)

Activity Based Costing:

Activity cost pools	Activity Rate
Labor - related	$43.36($247152 ÷ 5700 DLHs)
Production orders	$ $22.30 ($28990 ÷ 1300setsups)
Order size	$51.41 ($519,241 ÷ 10100MHs)

Activity cost pools	Product S9
Labor related	$156,096 (3,600 ×$43.36)
Production orders	$15,610 (700 ×$22.30)
Order size	$267,332 (5,200 × $51.41)
Total overhead	$439038
÷ by units	900
Product S9 overhead per unit	$487.82

Difference under both method = $558.16 - $487.82

= $70.34

The unit product costs of Product S9 under traditional costing is greater than it's unit product costs under activity based costing by $70.34.