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Adams Company has two products: A and B. The annual production and sales of Product A is 1,900 units and of Product B is 1,300 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.7 direct labor-hours per unit. The total estimated overhead for next period is $101,075.
The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools–Activity 1, Activity 2, and General Factory–with estimated overhead costs and expected activity as follows:
| Total | Estimated Overhead Costs |
Expected Activity | |||
| Product A | Product B | Total | |||
| Activity 1 | $31,232 | 1,200 | 800 | 2,000 | |
| Activity 2 | 17,789 | 1,900 | 400 | 2,300 | |
| General Factory | 52,054 | 760 | 910 | 1,670 | |
| Total | $101,075 | ||||
| (Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.) |
| The overhead cost per unit of Product B under the traditional costing system is closest to: |
$42.36
$24.20
$18.16
$14.01
Expert Answer
| Adams Company | Product A | Product B | Total |
| Annual Production & Sales | 1900 | 1300 | 3200 |
| Labor Hour Per Unit | 0.4 | 0.7 | |
| Total Labor Hours | 760 | 910 | 1670 |
| Total Overhead | 101075 | ||
| Recovery Rate PU | 60.52 | ||
| (Overhead Cost/Total Labor Hours) | |||
| Direct Labor PU in Product B | 0.7 | ||
| (Recovery Rate* DLH PU-Product B) | 42.367 | ||
| Answer is 42.36 |
