Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows: Information (on a per unit basis) related to three popular products at Njombe are as follows:
In comparing the traditional system with the activity-based costing system, which of Njombe's Models had higher unit product costs under the traditional system?

Question

Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:  Information (on a per unit basis) related to three popular products at Njombe are as follows:
 In comparing the traditional system with the activity-based costing system, which of Njombe's Models had higher unit product costs under the traditional system?

Quizplus · Accepted Answer

The activity rates are computed as follows:
 11eacbfc_c8a2_0625_8ffe_31b5a1beb94f_TB7552_00 The overhead cost charged to Model #19 is:
 11eacbfc_c8a2_2d36_8ffe_3d1fdef2ed55_TB7552_00 The overhead cost charged to Model # 36 is:
 11eacbfc_c8a2_2d37_8ffe_854027a86455_TB7552_00 The overhead cost charged to Model # 58 is:
 11eacbfc_c8a2_5448_8ffe_45178e731915_TB7552_00 Traditional product costing overhead cost:
 11eacbfc_c8a2_5449_8ffe_9f74743b313b_TB7552_00 The overhead costs are the only difference in unit product costs between the traditional costing system and the activity-based costing system. Therefore, Model #19 is the only product that has a higher unit product cost under the traditional system.

Njombe Corporation Manufactures a Variety of Products