Question

Believing that its traditional cost system may be providing misleading information, Farragut Manufacturing is considering an activity-based costing (ABC) approach. It now employs a traditional cost system and has been applying its manufacturing overhead on the basis of machine hours.

Farragut plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted.

		Budgeted	Budgeted
Activity	Cost Driver	Activity	Cost
Material handling	No. of parts handled	6,000,000	$   720,000
Setup costs	No. of setups	750	315,000
Machining costs	Machine hours	30,000	540,000
Quality control	No. of batches	500	225,000
Total manufacturing overhead cost:			$1,800,000

Cost, sales, and production data for one of Farragut’s products for the coming year are as follows:

Prime costs:
Direct material cost per unit	$4.40
Direct labor cost per unit
.05 DLH @ $15.00/DLH	.75
Total prime cost	$5.15
Sales and production data:
Expected sales	20,000 units
Batch size	5,000 units
Setups	2 per batch
Total parts per finished unit	5 parts
Machine hours required	80 MH per batch

If Farragut employs an activity-based costing system, the cost per unit for the product described for the coming year would be
A.	$6.00
B.	$6.08
C.	$6.30
D.	$6.21

Answer 1

Answer is $6.30