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Cost allocation

Kenyon Company produces two products (F56 and F57), applying
manufacturing overhead on the basis of direct labor hours. Anticipated
unit production costs (material, labor, and overhead) and manufacturing
volumes are:

F56: 2,000 units, $234
F57: 3,500 units, $271

Kenyon's overhead arises because of various activities, one of which is
purchase-order processing. Budgeted cost for this activity is expected
to be $70,000. The firm believes that the number of purchase orders
processed is a key cost driver and expects the following activity for
its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon's
selling prices are based heavily on cost.

Required:

B. Compute:
1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.
C. Assume that Kenyon switched to activity-based costing and calculated
total unit production costs as follows: F56, $285; F57, $220.
1. Which of the two products, F56 or F57, was overcosted prior to the
change to ABC? No explanation is necessary.
2. Which of the two products, F56 or F57, may have been less
competitive in the marketplace prior to the change to ABC? Briefly
explain.

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Solution Summary

The solution explains cost allocation using activity based costing

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