Eliezrie, Inc., manufactures and sells two products: Product G8 and Product O0. Data concerning the expected…
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Question “Eliezrie, Inc., manufactures and sells two products: Product G8 and Product O0. Data concerning the expected…”
Eliezrie, Inc., manufactures and sells two products: Product G8
and Product O0. Data concerning the expected production of each
product and the expected total direct labor-hours (DLHs) required
to produce that output appear below:
Expected Production | Direct Labor-Hours Per Unit | Total Direct Labor-Hours | |
Product G8 | 750 | 5.5 | 4,125 |
Product O0 | 350 | 2.5 | 875 |
Total direct labor-hours | 5,000 | ||
The direct labor rate is $22.60 per DLH. The direct materials
cost per unit for each product is given below:
Direct Materials Cost per Unit | |||
Product G8 | $118.10 | ||
Product O0 | $118.50 | ||
The company is considering adopting an activity-based costing
system with the following activity cost pools, activity measures,
and expected activity:
Estimated | Expected Activity | |||||
Activity Cost Pools | Activity Measures | Overhead Cost | Product G8 | Product O0 | Total | |
Labor-related | DLHs | $ | 58,055 | 4,125 | 875 | 5,000 |
Machine setups | setups | 56,890 | 650 | 625 | 1,275 | |
Order size | MHs | 368,008 | 5,050 | 5,600 | 10,650 | |
$ | 482,953 | |||||
Which of the following statements concerning the unit product
cost of Product G8 is true? (Round your intermediate
calculations to 2 decimal places.)
Multiple Choice
The unit product cost of Product G8 under traditional costing is
less than its unit product cost under activity-based costing by
$196.09.The unit product cost of Product G8 under traditional costing is
less than its unit product cost under activity-based costing by
$316.17.The unit product cost of Product G8 under traditional costing is
greater than its unit product cost under activity-based costing by
$316.17.The unit product cost of Product G8 under traditional costing is
greater than its unit product cost under activity-based costing by
$196.09.
Answer
Traditional Costing
Predetermined overhead rates = Estimated overhead costs / Direct labor hours. Predetermined overhead rates = $482,953/ 5,000
Predetermined overhead rate = $96.59 an hour
Product G8
Hours of direct labor per unit = 5.50
Direct labor cost per unit = Direct labor hours per unit * Direct labor rate per hour
Direct labor cost per unit = 5.50 * $22.60
Direct labor cost per unit = $124.30
Overhead per unit = Predetermined overhead rates * Direct labor hours
Overhead per unit = $96.59 * 5.50
Overhead per unit = $531.25
Unit product cost = Direct materials cost per unit + Direct labor cost per unit + Overhead per unit
Unit product cost = $118.10 + $124.30 + $531.25
Unit product cost = $773.65
Activity-based Costing:
Labor-related activity rate = Estimated overhead costs / Estimated labor
Labor-related activity rate = $58,055/5,000
Rate of labor related activity = $11.61 per hour
Machine setups activity rates = Estimated overhead costs / Estimated activities
Machine setups activity rate = $56,890/ 1,275
Rate of machine setups activity = $44.62 per set
Rate of activity for order size = Estimated overhead cost/Estimated activity
Rate of order size activity = $368,008/10,650
Rate for order size activities = $34.55/hour
Product G8
Total overhead = $11.61 * 4,125 + $44.62 * 650 + $34.55 * 5,050
Total overhead = $251,371.75
Overhead per unit = Total overhead / Units produced
Overhead per unit = $251,371.75 / 750
Overhead per unit = $335.16
Hours of direct labor per unit = 5.50
Direct labor cost per unit = Direct labor hours per unit * Direct labor rate per hour
Direct labor cost per unit = 5.50 * $22.60
Direct labor cost per unit = $124.30
Unit product cost = Direct materials cost per unit + Direct labor cost per unit + Overhead per unit
Unit product cost = $118.10 + $124.30 + $335.16
Unit product cost = $577.56
Cost of a unit product differs between $773.65 and $577.56
Price difference per unit: $196.09
Correct
Option:
Product G8’s unit product cost under traditional costing is $196.09 higher than its unit product costs under activity-based pricing.
Conclusion
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