Pazzo's Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo's Pizza anticipates that it will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:
Assuming that their estimates are final, what is the total cost per unit for the veggie pizzas? (Do not round intermediate calculations.)
A) $2.18
B) $3.21
C) $3.68
D) $4.02

Question

Pazzo's Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo's Pizza anticipates that it will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:
 Assuming that their estimates are final, what is the total cost per unit for the veggie pizzas? (Do not round intermediate calculations.)
A) $2.18 
B) $3.21 
C) $3.68 
D) $4.02

Quizplus · Accepted Answer

This question requires multiple steps in order to arrive at the correct total cost per unit for the veggie pizzas. First, calculate the total Direct Materials (DM) cost for veggie pizzas by taking $0.58 per pizza times 26,909 veggie pizzas to be produced: $0.58 × 26,909 = $15,607.22. Next, calculate the total Direct Labor (DL) cost for veggie pizzas by taking $1.57 per pizza times 26,909 veggie pizzas to be produced: $1.57 × 26,909 = $42,247.13. Then, calculate how much MOH will be allocated to the veggie pizzas by multiplying the per-activity rate by the quantity of each activity: ($88.77 × 250 square feet) + ($18.00 × 899 supervisor hours) + ($8.98 × 1,330 cleaning hours) = $22,192.50 + $16,182.00 + $11,943.40 = $50,317.90. Next, combine the DM, DL, and MOH costs. $15,607.22 + $42,247.13 + $50,317.90 = $108,172.25. Lastly, divide the total product cost by the number of veggie pizzas to be produced: $108,172.25/26,909 veggie pizzas = $4.02 per pizza (Choice D).

Pazzo's Pizza Utilizes Activity-Based Costing (ABC) to Account for Its