Martin Corporation manufactures two products-Plows and Harrows.The annual production and sales of Plows is 1,000 units,while 2,000 units of Harrows are produced and sold.The company has traditionally used direct labour hours to allocate its overhead to products.Plows require 5.0 direct labour hours per unit,while Harrows require 2.0 direct labour hours per unit.The total estimated overhead for the period is $603,500.The company is looking at the possibility of changing to an activity-based costing system for its products.If the company used an activity-based costing system,it would have the following three activity cost pools:

The overhead cost per Harrow using an activity-based costing system would be closest to

Question

Martin Corporation manufactures two products-Plows and Harrows.The annual production and sales of Plows is 1,000 units,while 2,000 units of Harrows are produced and sold.The company has traditionally used direct labour hours to allocate its overhead to products.Plows require 5.0 direct labour hours per unit,while Harrows require 2.0 direct labour hours per unit.The total estimated overhead for the period is $603,500.The company is looking at the possibility of changing to an activity-based costing system for its products.If the company used an activity-based costing system,it would have the following three activity cost pools:

The overhead cost per Harrow using an activity-based costing system would be closest to

Quizplus · Accepted Answer

First, we need to calculate the overhead cost per unit using the traditional direct labour hour costing system:

Overhead rate = Total estimated overhead / Total estimated direct labour hours
Overhead rate = $603,500 / (5.0 x 1,000 + 2.0 x 2,000)
Overhead rate = $603,500 / 9,000
Overhead rate = $67.06 per direct labour hour

To calculate the overhead cost per unit of Harrow using activity-based costing:

Activity-based costing overhead rate = Total cost of activity / Total activity
Activity-based costing overhead rate for Harrow = ($211,000 + $234,000 + $158,500) / 2,000
Activity-based costing overhead rate for Harrow = $603,500 / 2,000
Activity-based costing overhead rate for Harrow = $301.75 per unit

Therefore, the overhead cost per unit of Harrow using activity-based costing is $301.75, which is closest to option A) $127.17.

Martin Corporation Manufactures Two Products-Plows and Harrows