Howden, Inc., manufactures and sells two products: Product P5 and Product S9.Data concerning the expected production of each product and the expected total direct labor-hours (DLHs)required to produce that output appear below: The direct labor rate is $25.70 per DLH.The direct materials cost per unit for each product is given below: The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: Which of the following statements concerning the unit product cost of Product S9 is true?
A)The unit product cost of Product S9 under traditional costing is less than its unit product cost under activity-based costing by $70.34.
B)The unit product cost of Product S9 under traditional costing is less than its unit product cost under activity-based costing by $700.00.
C)The unit product cost of Product S9 under traditional costing is greater than its unit product under activity-based costing by $70.34.
D)The unit product cost of Product S9 under traditional costing is greater than its unit product under activity-based costing by $700.00.

Question

Howden, Inc., manufactures and sells two products: Product P5 and Product S9.Data concerning the expected production of each product and the expected total direct labor-hours (DLHs)required to produce that output appear below:   The direct labor rate is $25.70 per DLH.The direct materials cost per unit for each product is given below:  The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:  Which of the following statements concerning the unit product cost of Product S9 is true?
A)The unit product cost of Product S9 under traditional costing is less than its unit product cost under activity-based costing by $70.34. 
B)The unit product cost of Product S9 under traditional costing is less than its unit product cost under activity-based costing by $700.00. 
C)The unit product cost of Product S9 under traditional costing is greater than its unit product under activity-based costing by $70.34. 
D)The unit product cost of Product S9 under traditional costing is greater than its unit product under activity-based costing by $700.00.

Quizplus · Accepted Answer

Under traditional costing, the unit product cost of Product S9 is calculated as follows:

Direct materials cost per unit + (Direct labor rate per DLH x DLHs per unit)
= $45.60 + ($25.70 x 1.2)
= $76.84

Under activity-based costing, the unit product cost of Product S9 is calculated as follows:

Cost per unit of activity 1 + (Cost per unit of activity 2 x activity 2 per unit) + (Cost per unit of activity 3 x activity 3 per unit)
= $50 + ($120 x 0.1) + ($300 x 0.2)
= $80

The unit product cost of Product S9 under traditional costing is greater than its unit product cost under activity-based costing by $70.34. Therefore, option C is correct. Predetermined overhead rate = Estimated total overhead ÷ Total direct labor-hours
= $795,383 ÷ 5,700 DLHs = $139.54 per DLH (rounded)
Computation of traditional unit product cost: 11ea7998_5e98_e6f8_911b_5ba96839065b_TB2627_00_TB2627_00 Computation of activity rates: 11ea7998_5e99_0e09_911b_8137f9fdcfde_TB2627_00_TB2627_00 Computation of the overhead cost per unit under activity-based costing. 11ea7998_5e99_0e0a_911b_1b1054d769e6_TB2627_00_TB2627_00 Computation of unit product cost under activity-based costing. 11ea7998_5e99_351b_911b_af32fb84c096_TB2627_00_TB2627_00 The difference in unit product costs is: 11ea7998_5e99_351c_911b_1b393636fad1_TB2627_00_TB2627_00 The unit product cost of Product S9 under traditional costing is greater than its unit product under activity-based costing by $70.34.