Prepare for World Company, in good form and without abbreviations, a computation of the estimated product cost per unit for the current period using the activity-based costing approach.
World Company manufactures two products, Product X and Product Z. The company estimates it will incur $100,000 of manufacturing overhead for the current period. Overhead currently is assigned to the products using direct labor hours. Data concerning the current period’s operations under the traditional system are:
Product X Product Z
Estimated volume in units 400 1,500
Direct labor hours per unit 0.70 1.20
Direct materials cost per unit $10.50 $16.75
Direct labor cost per unit $11.25 $20.00
Manufacturing overhead cost per unit* $33.66 $57.70
* Using direct labor hours as the allocation base: 400 units x 0.7 direct labor hours per unit + 1,500 units x 1.2 direct labor hours per unit = 2,080 estimated direct labor hours; $100,000 estimated manufacturing overhead/2,080 direct labor hours (DLH) = $48.08 per DLH; $48.08 x 0.70 = $33.66 and $48.08 x 1.20 = $57.70.
In order to compute estimated cost under activity-based costing, the company has identified two activity cost pools, broken down the estimated overhead, and estimated activity levels as follows:
Estimated Estimated Activity
Activity Cost Pool Overhead Product X Product Z Total
Setup machines $ 20,000 200 300 500
Prepare purchase orders 80,000 900 500 1,400
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