Question

Boahn, Inc., manufactures and sells two products: Product B6 and Product W8. 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 B6	200	7.0	1,400
Product W8	100	9.0	900
Total direct labor-hours			2,300

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 B6	Product W8	Total
Labor-related	DLHs	$91,149	1,400	900	2,300
Machine setups	setups	54,549	500	400	900
General factory	MHs	329,550	3,200	3,300	6,500
		$475,248

If the company allocates all of its overhead based on direct labor-hours using its traditional costing method, the overhead assigned to each unit of Product W8 would be closest to:

a) $1,859.67 per unit

b) $356.67 per unit

c) $545.49 per unit

d) $456.30 per unit

Answer 1

a) $1,859.67 per unit

Working:

a)	Overhead rate based on direct labor hours				=	Total Overhead costs/Total Direct Labor hours
					=	$     4,75,248	/	2300
					=	$       206.63
b)	Overhead assigned to product W8				=	Direct labor hours x Recovery rate
					=	900 x $ 206.63
					=	$1,85,966.61
c)	Overhead per unit of W8				=	Overhead assigned to W8/Units of W8
					=	$1,85,966.61	/	100
					=	$     1,859.67