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ABC: Activity Based Costing

Cabat Company manufactures two products, Product C and Product D. The company estimated it would incur $177,910 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below:

Product C Product D
Estimated volume 3,800 units 3,000 units
Direct Labor hours per unit 1.20 hours 0.80 hour
Direct materials cost per unit $11.60 $23.70
Direct labor cost per unit $10.80 $7.20

Required:

a. Compute the predetermined overhead rate, and determine the unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Activity Cost Pool Estimated Overhead Costs Expected Activity

Product C Product D Total
Machine setups $12,190 110 120 230
Purchase Orders 75,240 820 1,160 1,980
General factory 90,480 4,560 2,400 6,960
$177,910

Determine the unit product cost of each product for the current period using the activity-based costing approach.

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Part A
Total number of direct labor hours = 3,800 * 1.20 + 3,000 * 0.80 = 6,960
Manufacturing overhead per direct labor hour = $177,910/6,960 = $25.56
Overhead per unit of C = 1.20 * $25.56 = $30.67
Overhead per unit of D = 0.80 * $25.56 = $20.45
Cost per unit of C = $11.60 + $10.80 + ...

Solution Summary

Determination of overhead rates using ABC

$2.19