The computation of the total cost per unit for each product is as follows:
Standard Deluxe
Direct materials per unit $11.00 42.00
Direct labor per unit 18.00 18.00
Overhead cost per unit 14.57 15.17
Total cost per unit $43.57 $74.17
<h3>What is the ABC costing system?</h3>
The ABC (Activity-based costing) costing system is a costing method that:
- Identifies activities in an organization.
- Assigns the overhead cost of each activity to all products and services.
- Cost assignment is based on the actual consumption by each.
The ABC costing system is not like the traditional costing system that uses a single plantwide rate as the overhead rate based on a single cost driver.
<h3>Question Completion:</h3>
Both products require 2 hours of direct labor for completion. Therefore, total annual direct labor hours are 140,000 [2 hrs. × (20,000 + 50,000)]. The expected annual manufacturing overhead is $1,050,000. Thus, the predetermined overhead rate is $7.50 ($1,050,000 ÷ 140,000) per direct labor hour. The direct materials cost per unit is $42 for the deluxe model and $11 for the standard model. The direct labor cost is $18 per unit for both the deluxe and the standard models.
The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.
Required
Compute the total cost per unit for each product under ABC.
<h3>Data and Calculations:</h3>
Activity Cost Pool Cost Driver Estimated Expected Use Expected Use
Overhead of Cost Drivers of Drivers by
Product
Standard Deluxe
Purchasing Orders $ 126,000 400 100 300
Receiving Pounds 30,000 20,000 4,000 16,000
Assembling Number of parts 444,000 74,000 20,000 54,000
Testing Number of tests 115,000 23,000 10,000 13,000
Finishing Units 140,000 70,000 20,000 50,000
Packing & shipping Pounds 195,000 80,000 18,000 62,000
Total $1,050,000
Overhead rate per Activity Cost Pool
Activity Cost Pool Cost Driver Estimated Expected Use Overhead
Overhead of Cost Drivers Rates
Purchasing Orders $ 126,000 400 $315 ($126,000/400)
Receiving Pounds 30,000 20,000 $1.50 ($30,000/20,000)
Assembling Number of parts 444,000 74,000 $6.00 ($444,000/74,000)
Testing Number of tests 115,000 23,000 $5.00 $115,000/23,000)
Finishing Units 140,000 70,000 $2.00 ($140,000/70,000)
Packing & shipping Pounds 195,000 80,000 $2.4375 ($195,000/80,000)
Allocation of Overhead per product:
Activity Cost Pool Overhead Standard Deluxe
Purchasing $315 $31,500 (100 x $315) $94,500 (300 x $315)
Receiving $1.50 6,000 (4,000 x $1.5) 24,000 (16,000 x $1.5)
Assembling $6.00 120,000 (20,000 x $6) 324,000 (54,000 x $6)
Testing $5.00 50,000 (10,000x $5) 65,000 (13,000 x $5)
Finishing $2.00 40,000 (20,000 x $2) 100,000 (50,000 x $2)
Packing &
shipping Pounds $2.4375 43,875 (18,000 x $2.4375) 151,125 (62,000 x $2.4375)
Total overhead allocated $291,375 $758,625 $1,050,000
Total units produced 20,000 50,000
Overhead per unit $14.57 $15.17
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