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    Cost Drivers in a Given Situation

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    Shannon Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:
    Production Volume in units A: 2,500
    Production Volume in units of B: 5,000
    Direct material per unit A: $40
    Direct materials per unit of B: $60
    Direct Labor for A: 2 hours @ $12 per hour
    Direct Labor for B: 3 hours @ $12 per hour
    Manufacturing Overhead for A: 2 hours @ $93
    Manufacturing Overhead for B: 3 hours @ $93

    Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available:

    Cost Pool: Cost
    General Factory 1,500,000
    Machine Processing 120,000
    Setups 240,000
    = $1,860,000

    The cost driver for the three cost pools are: number of setups, direct labor hour and machine hours, respectively.

    Product A uses 100 setups, 5,000 direct labor hours and 2,200 machine hours. Product B uses 20 setups, 15,000 direct labor hours and 800 machine hours. Product C uses 120 setups, 20,000 direct labor hours and 3,000 machine hours. The company determines selling prices by adding 40% to a product's total cost. Compute B's total per-unit cost and selling price under activity-based costing. (Partial credit is given, if necessary.)

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    Shannon Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:
    Production Volume in units A: 2,500
    Production Volume in units of B: 5,000
    Direct material per unit A: $40
    Direct materials per unit of B: $60
    Direct Labor for A: 2 hours @ $12 per hour
    Direct Labor for B: 3 hours @ $12 ...

    Solution Summary

    The expert examines the cost drivers in a given situation.

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