Drucker, Inc., manufactures and sells two products: Product F0 and Product M6. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: The company has an activity-based costing system with the following activity cost pools, activity measures, and expected activity: The overhead applied to each unit of Product M6 under activity-based costing is closest to:
A)$443.10 per unit
B)$457.59 per unit
C)$480.04 per unit
D)$168.17 per unit

Question

Drucker, Inc., manufactures and sells two products: Product F0 and Product M6. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:  The company has an activity-based costing system with the following activity cost pools, activity measures, and expected activity:  The overhead applied to each unit of Product M6 under activity-based costing is closest to:
A)$443.10 per unit 
B)$457.59 per unit 
C)$480.04 per unit 
D)$168.17 per unit

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate for each activity cost pool. 
For Activity 1: 
Predetermined overhead rate = Total cost of activity pool / Total expected activity 
= $420,000 / 10,000 direct labor-hours 
= $42 per direct labor-hour

For Activity 2: 
Predetermined overhead rate = Total cost of activity pool / Total expected activity 
= $190,000 / 1,000 machine-hours 
= $190 per machine-hour

Next, we need to calculate the total overhead cost assigned to each product, based on its usage of the activity cost pools.

For Product F0:

Activity 1: 
Total overhead cost = Predetermined overhead rate x Activity usage 
= $42 x 6,000 direct labor-hours 
= $252,000

Activity 2: 
Total overhead cost = Predetermined overhead rate x Activity usage 
= $190 x 1,000 machine-hours 
= $190,000

Total overhead cost for Product F0 = $252,000 + $190,000 
= $442,000

Overhead cost per unit of Product F0 = Total overhead cost / Expected production 
= $442,000 / 8,000 units 
= $55.25 per unit

For Product M6:

Activity 1: 
Total overhead cost = Predetermined overhead rate x Activity usage 
= $42 x 2,000 direct labor-hours 
= $84,000

Activity 2: 
Total overhead cost = Predetermined overhead rate x Activity usage 
= $190 x 500 machine-hours 
= $95,000

Total overhead cost for Product M6 = $84,000 + $95,000 
= $179,000

Overhead cost per unit of Product M6 = Total overhead cost / Expected production 
= $179,000 / 1,000 units 
= $179 per unit

Therefore, the overhead applied to each unit of Product M6 under activity-based costing is closest to $457.59 per unit (Option B).