Question

Faz, Inc., manufactures and sells two products: Product X0 and Product W7. 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 X0	2,000	4	8,000
Product W7	580	2	1,160
Total direct labor-hours			9,160

The direct labor rate is $37.60 per DLH. The direct materials cost per unit is $162.50 for Product X0 and $144 for Product W7.

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 X0	Product W7	Total
Labor-related	DLHs	$	290,078	8,000	1,160	9,160
Production orders	orders		20,748	680	880	1,560
Order size	MHs		253,654	4,180	4,280	8,460
		$	564,480

Which of the following statements concerning the unit product cost of Product W7 is true?

Answer 1

Answer 2

To calculate the unit product cost of Product W7 using activity-based costing, we need to allocate the overhead costs to each product based on their consumption of the activity measures.

For the Labor-related activity cost pool, the total expected direct labor-hours are 1,160. Since Product W7 requires 580 units and each unit requires 2 direct labor-hours, the total direct labor-hours required for Product W7 is 1,160 / 2 = 580. Therefore, the expected overhead cost for Product W7 for the Labor-related activity cost pool is:

($290,078 / 9,160) x 580 = $14,720.84

For the Production orders activity cost pool, the expected overhead cost is allocated based on the number of production orders. Since Product W7 requires 880 production orders out of a total of 1,560, the expected overhead cost for Product W7 for the Production orders activity cost pool is:

($20,748 / 1,560) x 880 = $11,693.85

For the Order size activity cost pool, the expected overhead cost is allocated based on the machine hours. Since Product W7 requires 4,280 machine hours out of a total of 8,460, the expected overhead cost for Product W7 for the Order size activity cost pool is:

($253,654 / 8,460) x 4,280 = $128,153.33

Therefore, the total overhead cost for Product W7 is:

$14,720.84 + $11,693.85 + $128,153.33 = $154,567.02

The direct materials cost per unit is $144, and the direct labor cost per unit is 580 x $37.60 = $21,848. Therefore, the unit product cost of Product W7 is:

$144 + $21,848 + ($154,567.02 / 580) = $540.58

Therefore, the true statement regarding the unit product cost of Product W7 is that it is $540.58.