Question

Exercise 2A-3 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing (LO2- 5) Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company's two product lines appear below: Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production $ 56.00 $ 14.00 0.70 DLHS 10,000 units Standard $ 44.00 $ 11.60 1.40 DLHS 50,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead Estimated total direct labor-hours 77,000 DLHS Required: 1. Determine the unit product costs of the Deluxe and Standard products under the company's traditional costing system. 2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools: Expected Activity Total Estimated Overhead Cost $ 385,000 96,000 57,000 $ 538,000 Activity Cost Pools and Activity Measures Supporting direct labor (direct labor-hours) Bateh setups (setups) Safety testing (tests) Total manufacturing overhead cost 11.000 Deluxe Standard 7,000 70,000 200 100 30 Determine the unit product costs of the Deluxe and Standard products under the activity based absorption costing system.

Answer 1

Activity overhead cost rate: Total cost/total activity
	Total Cost	Total Activity	OH rate
Assembly	385000	77000	5
Inspection	96000	300	320
Packaging	57000	100	570
Overhead assigned:
	OH rate	Deluxe activity	Deluxe OH	Standard activity	Standard OH
Assembly	5	7000	35000	70000	350000
Inspection	320	200	64000	100	32000
Packaging	570	30	17100	70	39900
Total OH assigned			116100		421900
Units produced			10000		50000
OH per unit			11.61		8.44
Unit Product Cost	Deluxe	Standard
DM	56	44
DL	14	11.6
OH	11.61	8.44
Total unit cost	81.61	64.04