Question

Jake Inc manufactures two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 1,000 units. The company currently uses Direct Labor Hours as the basis for applying all Manufacturing Overhead to products. Product A requires 0.4 Direct Labor Hours per unit and Product B requires 0.2 Direct Labor Hours per unit (direct labor is $20 per hour). Also, direct materials is $5 for Product A and $10 for Product B. The total estimated overhead for next period is $68,756. Jake Inc is in an extremely competitive industry and has been struggling, financially, even while experiencing strong demand for its products. Jake uses a 20% markup on cost to price its products. Jake is considering switching to an Activity-Based Costing system. The new Activity-Based Costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:

(Note: The General Factory activity cost pool's costs are allocated on the basis of Direct Labor Hours.)

Estimated

Overhead               Expected Activity

Activity Cost Pool      Costs               Product A        Product B       Total

Activity 1 ................ $31,031             1,000               300                  1,300

Activity 2 ................ $22,249             1,600               300                  1,900

General Factory....... $15,476             200                  200                 400

Total ........................ $68,756

The Company has hired a consultant, you, to explain the financial struggles.

Answer 1

Solution:-

Activity	Costs	Basis (ratio)	Cost per activity
Activity 1	31,031	1,000 : 300	23.87
Activity 2	22,249	1,600 : 300	11.71
General factory	15,476	200 : 200	38.69

Statement of cost
	Product A	Product B
Direct material	2,500	10,000
Direct labor	4,000	4,000
Activity 1	23,870	7,161
Activity 2	18,736	3,513
General factory	7,738	7,738
Total cost	56,844	32,412
Divede by number of units	500	1000
Cost per unit	113.688	32.412
Add mark up	22.7376	6.4824
Salling price per unit	136.4256	38.8944