Paolello, Inc., manufactures and sells two products: Product P5 and Product N5. 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 $24.60 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 overhead applied to each unit of Product P5 under activity-based costing is closest to:

Question

Paolello, Inc., manufactures and sells two products: Product P5 and Product N5. 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 $24.60 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 overhead applied to each unit of Product P5 under activity-based costing is closest to:

Quizplus · Accepted Answer

Step 1: Calculate the predetermined overhead rate for each activity cost pool.

Predetermined overhead rate = Total estimated overhead cost / Total expected activity

Activity 1: $163,500 / 3,000 = $54.50 per unit of Product P5
Activity 2: $117,000 / 4,500 = $26.00 per DLH
Activity 3: $81,900 / 2,700 = $30.33 per unit of Product N5

Step 2: Calculate the total overhead cost assigned to each product.

Product P5:
Activity 1: $54.50 per unit x 5,500 units = $299,750
Activity 2: $26.00 per DLH x 18,000 DLHs = $468,000
Total overhead cost assigned to Product P5 = $767,750

Product N5:
Activity 3: $30.33 per unit x 7,500 units = $227,475
Total overhead cost assigned to Product N5 = $227,475

Step 3: Calculate the overhead cost per unit for each product.

Product P5:
Total overhead cost assigned to Product P5 = $767,750
Total units of Product P5 = 5,500 units
Overhead cost per unit of Product P5 = $767,750 / 5,500 units = $139.59 per unit

Product N5:
Total overhead cost assigned to Product N5 = $227,475
Total units of Product N5 = 7,500 units
Overhead cost per unit of Product N5 = $227,475 / 7,500 units = $30.33 per unit

Step 4: Calculate the total cost per unit for each product.

Product P5:
Direct materials cost per unit = $96.00
Direct labor cost per unit = 3 DLHs x $24.60 per DLH = $73.80
Overhead cost per unit = $139.59
Total cost per unit of Product P5 = $96.00 + $73.80 + $139.59 = $309.39

Product N5:
Direct materials cost per unit = $64.00
Direct labor cost per unit = 1 DLH x $24.60 per DLH = $24.60
Overhead cost per unit = $30.33
Total cost per unit of Product N5 = $64.00 + $24.60 + $30.33 = $119.93

Therefore, the overhead applied to each unit of Product P5 under activity-based costing is closest to $541.07 per unit (Option B).