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Activity Based Costing (ABC) Class exercise

Cabalo Company manufactures two products, Product C and Product D. The company estimated
it would incur $130,890 in manufacturing overhead costs during the current period. Overhead
currently is applied to the products on the basis of direct labor hours. Data concerning the current
period's operations appear below:

Estimatedunitproduction....................
Directlaborhoursperunit...................
Directmaterialscostperunit...............
Directlaborcostperunit......................

ProductC
400units
0.70hour
$10.70
$11.20

ProductD
1,200units
1.20hours
$16.70
$19.20

Required:
a)Computethepredeterminedoverheadrateunderthecurrentmethod,anddeterminetheunit
productcostofeachproductforthecurrentyear.
b)Thecompanyisconsideringusinganactivitybasedcostingsystemtocomputeunitproduct
costsforexternalfinancialreportsinsteadofitstraditionalsystembasedondirectlabor
hours.Theactivitybasedcostingsystemwouldusethreeactivitycostpools.Datarelating
totheseactivitiesforthecurrentperiodaregivenbelow:
Estimate
d
Overhea
d
ActivityCostPool
Machinesetups.............
Purchaseorders............
Generalfactory.............

Costs
$13,570
91,520
25,800
$130,890

ExpectedActivity
Product
Product
C
D
100
130
810
1,270
280
1,440

Total
230
2,080
1,720

Determinetheunitproductcostofeachproductforthecurrentperiodusingtheactivity
basedcostingapproach.
c)

Comment on the comparative unit product cost under traditional costing and ABC.

ANSWER:
a. The expected total direct labor hours during the period are computed as follows:
ProductC:400units0.7hoursperunit........
280hours
ProductD:1,200units1.2hoursperunit..... 1,440hours
Totaldirectlaborhours.................................... 1,720hours
Usingthesehoursasabase,thepredeterminedoverheadusingdirectlaborhourswould
be:
Estimatedoverheadcost,$130,890Estimateddirectlaborhours,1,720
=$76.10/DLH
Usingthisoverheadrate,theunitproductcostsare:
Product
C
Directmaterials..............................
$10.70
Directlabor....................................
11.20
Manufacturingoverhead................
53.27
Totalunitproductcost...................
$75.17

Product
D
$16.70
19.20
91.32
$127.22

b. Theoverheadratesforeachactivitycostpoolareasfollows:
Estimate
d
Overhea Expecte Overhea
d
d
d
Costs
Activity
Rate
Machinesetups.............
$13,570
230
$59.00
Purchaseorders............
$91,520
2,080
$44.00
Generalfactory.............
$25,800
1,720
$15.00
Theoverheadcostchargedtoeachproductis:
ProductC
ProductD
Activity Amount Activity Amount
Machinesetups.............
100 $5,900
130 $7,670
Purchaseorders............
810
35,640
1,270
55,880
Generalfactory.............
280 4,200
1,440 21,600
Totaloverheadcost......
$45,740
$85,150
Overheadcostperunit:
ProductC:$45,740400units=$114.35perunit
ProductD:$85,1501,200units= $70.96perunit

Usingactivitybasedcosting,theunitproductcostofeachproductwouldbe:

Directmaterials.....................
Directlabor...........................
Manufacturingoverhead.......
Totalunitproductcost..........

Product
C
$10.70
11.20
114.35
$136.25

Product
D
$16.70
19.20
70.96
$106.86

c.

Unit Product
Cost

Product C
Traditional
ABC
$75.17
$136.25
Understated by $61.08
Price might be understated. Demand
would be high but the price might
not be sufficient to cover cost of the
products

Product D
Traditional
ABC
$127.22
$106.86
Overstated by $20.36
Price might be overstated and lost
out to competitors