A company has two products: A and B. It uses activity-based costing and has prep

Question

A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three acivity cot pools.

Activity 1

Annual Production and sales level of Product A is, 34,300 units, and the annual production and sales level of Product B is 69,550 Units. What is the approximate overhead cost per unit of Product A under activity based costing?

Cost Pool Budgeted Cost Product A Product B

Activity 1

$87,000 3,000 2,800 Activity 2 $62,000 4,500 5,500 Activity 3 $93,000 2,500 5,250

Explanation / Answer

Total of Activity 1 for product A and B

= 3,000 + 2,800

= 5,800

So, unit cost of Activity 1

= Total cost / Total quantity

= $87,000 / 5,800

= $15 per activity 1

So, cost of Activity 1 allocated to Product A in total

= Quantity of product A activity x Activity cost driver rate

= 3,000 x $15

= $45,000

Similarly, for activity 2

Total pool of activity 2

= 4,500 + 5,500

= 10,000

So, Activity cost driver rate for activity 2

= Cost / Quantity of activity

= $62,000 / 10,000

= $6.20

So, activity cost allocated to Product A

= 4,500 x $6.20

= $27,900

Similarly for Activity 3

Cost driver total

= 2,500 + 5,250

= 7,750

So, cost driver rate

= $93,000 / 7,750

= $12 per activity

So, allocated cost of product A

= 2,500 x $12

= $30,000

So, total allocated overhead cost for product A

= $45,000 + $27,900 + $30,000

= $102,900

So, allocated overhead cost per unit of product A

= Total allocated overhead cost / Total units of product A

= $102,900 / 34,300

= $3 per unit

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