Question

Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools	Cost Pool Total			Cost Driver
Repair and maintenance on assembly machine	$	104,000		Number of units produced
Programming cost		168,000		Number of programming hours
Software inspections		12,000		Number of inspections
Product testing		16,000		Number of tests
Total overhead cost	$	300,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		16,000			2,000			190			1,400
Decoder Q		36,000			1,500			60			1,100
Total		52,000			3,500			250			2,500

Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow:

	Direct Labor Hours
Decoder P		8,000
Decoder Q		16,000
Total		24,000

Required

Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Answer 1

A) Direct labour hours basis

Overhead rate = total overhead / total direct labour hours

= 300000 / 24000 = 12.5

Overhead in P = 8000 hours * 12.5 = 100000 Per unit = 100000/16000 = 6.25

Overhead in Q = 16000*12.5 = 200000 Per unit = 200000/36000 = 5.55

B) ABC basis

Calculation Of activity rate

Activity	Cost pool	Cost drivers	Rate
Reapair and maint.	104000	52000 no of units	2
programming	168000	3500 prog hours	48
software inspection	12000	250 inspections	48
Product testing	16000	2500 tests	6.4

Calculation of overheads

Activity	Rate	P	Q
Reapair and maint.	2	(16000*2) 32000	72000
programming	48	96000	72000
software inspection	48	9120	2880
Product testing	6.4	8960	7040
TOTAL		146080	153920
Units		16000	36000
Per unit		9.13	4.27