Whiteley, Inc., manufactures and sells two products: Product M5 and Product P4. 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 $27.50 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: The unit product cost of Product P4 under activity-based costing is closest to:
A)$3,716.76 per unit
B)$3,135.65 per unit
C)$4,226.79 per unit
D)$3,648.00 per unit

Question

Whiteley, Inc., manufactures and sells two products: Product M5 and Product P4. 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 $27.50 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:  The unit product cost of Product P4 under activity-based costing is closest to:
A)$3,716.76 per unit 
B)$3,135.65 per unit 
C)$4,226.79 per unit 
D)$3,648.00 per unit

Quizplus · Accepted Answer

To calculate the unit product cost of Product P4 under activity-based costing, we need to allocate the cost of each activity pool to each product based on their usage of the activity measure.

First, we calculate the allocation rates for each activity pool:

Activity Pool 1 Allocation Rate = $310,000 / 5,500 DLHs = $56.36/DLH

Activity Pool 2 Allocation Rate = $270,000 / 45,000 machine-hours = $6.00/machine-hour

Activity Pool 3 Allocation Rate = $225,000 / 15,000 setups = $15.00/setup

Next, we use these allocation rates to allocate the cost of each activity pool to each product:

Product M5:

Activity Pool 1 Cost = 3,000 DLHs x $56.36/DLH = $169,080
Activity Pool 2 Cost = 18,000 machine-hours x $6.00/machine-hour = $108,000
Activity Pool 3 Cost = 5,000 setups x $15.00/setup = $75,000
Total Cost = $352,080
Total DLHs = 3,000 DLHs + 2,500 DLHs = 5,500 DLHs
DLH Cost per Unit = $27.50/DLH x 5 DLHs = $137.50 per unit
Direct Materials Cost per Unit = $450.00 per unit
Total Unit Cost = $137.50 per unit + $450.00 per unit + ($352,080 / 3,500 units) = $662.94 per unit

Product P4:

Activity Pool 1 Cost = 2,500 DLHs x $56.36/DLH = $140,900
Activity Pool 2 Cost = 14,000 machine-hours x $6.00/machine-hour = $84,000
Activity Pool 3 Cost = 10,000 setups x $15.00/setup = $150,000
Total Cost = $374,900
Total DLHs = 2,500 DLHs + 7,500 DLHs = 10,000 DLHs
DLH Cost per Unit = $27.50/DLH x 4 DLHs = $110.00 per unit
Direct Materials Cost per Unit = $550.00 per unit
Total Unit Cost = $110.00 per unit + $550.00 per unit + ($374,900 / 90 units) = $4,226.79 per unit

Therefore, the unit product cost of Product P4 under activity-based costing is $4,226.79 per unit (Option C).