Answer:
Per unit cost under traditional allocation method
Gas smoker Electric smoker
Direct material cost 15 20
Direct labour cost 25 45
Overhead applied @ $125/hr <u>281.25 </u> <u>262.50</u>
Per unit cost <u> </u><u>321.25 </u> <u>327.50</u>
Overhead applied:
Gas smoker = <u>$125 x 45,000</u> hours
20,000 units
= $281.25
Electric smoker = <u>$125 x 105,000</u> hours
50,000 units
= $262.50
Per unit cost using ABC
Gas smoker Electric smoker
Direct material cost 15 20
Direct labour cost 25 45
Overhead applied:
Machine set-up 0.10 0.06
Machine processing 90 84
Material requisition <u>0.9</u> <u>0.14</u>
Per unit cost <u>131 </u> <u>149.20</u>
Calculation of cost driver rates
Machine set-up = $5,000/250 set-ups = $20 per unit
Machine processing = $6,000,000/150,000 hrs = $40 per machine hour
Material requisitions = $25,000/500 parts = $50 per part
Calculation of overhead applied
Machine set up
Gas smoker = <u>$20 x 100</u>
20,000 units
= $0.10 per unit
Electric smoker = <u>$20 x 150</u>
50,000 units
= $0.06
Machine processing
Gas smoker = <u>$40 x 45,000</u> machine hours
20,000 units
= $90 per unit
Electric smoker = <u>$40 x 105,000</u> machine hours
50,000 units
= $84
Material requisition
Gas smoker = <u>$50 x 360 parts</u>
20,000 units
= $0.9 per unit
Electric smoker = <u>$50 x 140 parts</u>
50,000 units
= $0.14 per unit Traditional allocation method is over-absorbed by $190.25 for Gas smoker and $78.30 for Electric smoker. The over-absorption is the difference between the overhead absorbed in each method.
Explanation:
In traditional allocation method, per unit cost is calculated by adding the direct material cost, direct labour cost and overhead applied. Overhead applied is calculated by multiplying the overhead rate given by machine hours for each product divided by the number of units.
In activity-based allocation method, per unit cost is the aggregate of direct material cost, direct labour cost and overhead applied for each cost pool. The cost driver rate is obtained by dividing the overhead for each cost pool by the total cost driver. Then, we will multiply the cost driver rate by the cost driver for each product divided by the number of units in order to derive the overhead applied.