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    Cost allocation

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    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.


    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

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    Solution Summary

    The solution explains cost allocation using activity based costing