Question

Arntson, Inc., manufactures and sells two products: Product R3 and Product N0. The annual production and sales of Product of R3 is 1,200 units and of Product N0 is 200 units. 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 R3	1,200	8.0	9,600
Product N0	200	4.0	800
Total direct labor-hours			10,400

The direct labor rate is $27.20 per DLH. The direct materials cost per unit is $200.00 for Product R3 and $288.00 for Product N0.

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 R3	Product N0	Total
Labor-related	DLHs	$	40,236	9,600	800	10,400
Production orders	orders		63,430	1,300	200	1,500
Order size	MHs		432,675	3,100	3,900	7,000
		$	536,341

The unit product cost of Product R3 under activity-based costing is closest to:

Answer 1

1. Activity rate

Activity	Cost Pool	/	Cost Driver	=	Activity Rate
Labor-related	$40,236	/	10,400 DLHs	=	$3.87 per DLH
Production orders	$63,430	/	1,500 orders	=	$42.29 per order
Order Size	$432,675	/	7,000 MHs	=	$61.81 per MH

2. Allocation of overhead cost to Product R3

Activity	Cost Driver	x	Activity rate	=	Overhead cost
Labor-related	9,600 DLHs	x	$3.87	=	$37,152
Production orders	1,300 orders	x	$42.29	=	$54,977
Order Size	3,100 MHs	x	$61.81	=	$191,611
Overhead cost				=	$283,740

Overhead cost per unit = $283,740 / 1,200 Units = $236.45 per unit

3. Unit Product cost of Product R3

Particulars	$
Direct Materials per unit	200.00
Direct Labor per unit (8.0 DLHs * $27.20 per DLH)	217.60
Overhead cost per unit	236.45
Unit Product cost	654.05

All the best...