Exercise 2A-3 Activity-Based Absorption Costing as an Alternative to Traditional

Question

Exercise 2A-3 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing [LO2- 5] Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company's two product lines appear below: Deluxe Standard Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production $ 60.00 $ 18.00 $ 48.00 $ 14.80 0.70 DLHs 10,000 units 1.40 DLHs 50,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead Estimated total direct labor-hours $554,000 77,000 DLHs Required 1. Determine the unit product costs of the Deluxe and Standard products under the company's traditional costing system 2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools

Explanation / Answer

1.unit product cost under traditional costing system.

note: predetermined overhead rate = estimated manufacturing overhead / estimated direct labour hours

=>$554,000 / 77,000

=>$7.19.....(rounded to 2 decimals)

overhead cost per unit of deluxe = $7.19 * 0.70 dlh

=>$5.03.

overhead per unit of standard = $7.19 * 1.40 dlh

=>$10.07.

required 2:

allocation of indirect costs using activity based costing:

now,

unit product cost:

Deluxe standard direct material $60.00 $48.00 direct labour 18.00 14.80 overhead per unit 5.03 10.07 unit product cost $83.03 $72.87

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