Larner Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:
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Activity Cost Pool Activity Rates
Labor-related $ 9.00 per direct labor-hour
Machine-related $ 5.00 per machine-hour
Machine setups $ 30.00 per setup
Production orders $ 200.00 per order
Shipments $ 160.00 per shipment
General factory $ 5.00 per direct labor-hour
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Cost and activity data have been supplied for the following products:
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 J78 B52
Direct materials cost per unit $ 4.00 $ 39.00
Direct labor cost per unit $ 4.00 $ 6.00
Number of units produced per year 2,000 200
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 Total Expected Activity
J78 B52
Direct labor-hours 1,400 30
Machine-hours 2,900 30
Machine setups 6 3
Production orders 4 3
Shipments 5 3
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Required:
Compute the unit product cost of each product listed above. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
The Correct Answer and Explanation is :
To determine the unit product cost for products J78 and B52 using Activity-Based Costing (ABC), we need to calculate both the direct costs (materials and labor) and the allocated overhead costs based on each product’s consumption of various activities.
Direct Costs per Unit:
- J78:
- Direct Materials: $4.00
- Direct Labor: $4.00
- Total Direct Costs: $4.00 + $4.00 = $8.00
- B52:
- Direct Materials: $39.00
- Direct Labor: $6.00
- Total Direct Costs: $39.00 + $6.00 = $45.00
Overhead Costs Allocation:
Using the provided activity rates, we calculate the total overhead costs for each product:
- J78:
- Labor-related: 1,400 direct labor-hours × $9.00 per hour = $12,600
- Machine-related: 2,900 machine-hours × $5.00 per hour = $14,500
- Machine Setups: 6 setups × $30.00 per setup = $180
- Production Orders: 4 orders × $200.00 per order = $800
- Shipments: 5 shipments × $160.00 per shipment = $800
- General Factory: 1,400 direct labor-hours × $5.00 per hour = $7,000
- Total Overhead Costs: $12,600 + $14,500 + $180 + $800 + $800 + $7,000 = $35,880
- Overhead Cost per Unit: $35,880 / 2,000 units = $17.94
- B52:
- Labor-related: 30 direct labor-hours × $9.00 per hour = $270
- Machine-related: 30 machine-hours × $5.00 per hour = $150
- Machine Setups: 3 setups × $30.00 per setup = $90
- Production Orders: 3 orders × $200.00 per order = $600
- Shipments: 3 shipments × $160.00 per shipment = $480
- General Factory: 30 direct labor-hours × $5.00 per hour = $150
- Total Overhead Costs: $270 + $150 + $90 + $600 + $480 + $150 = $1,740
- Overhead Cost per Unit: $1,740 / 200 units = $8.70
Total Unit Product Cost:
- J78:
- Total Unit Cost: $8.00 (Direct Costs) + $17.94 (Overhead) = $25.94
- B52:
- Total Unit Cost: $45.00 (Direct Costs) + $8.70 (Overhead) = $53.70
Explanation:
Activity-Based Costing (ABC) provides a more accurate method of assigning overhead costs to products by focusing on the actual activities that contribute to overhead. Unlike traditional costing methods that might allocate overhead based solely on direct labor hours or machine hours, ABC recognizes that different products consume resources differently.
In this scenario, product J78, despite having lower direct material and labor costs, incurs higher overhead costs per unit due to its substantial usage of machine hours and labor hours, as well as the number of setups, production orders, and shipments. This results in a higher overhead allocation per unit.
Conversely, product B52, while having higher direct material costs, utilizes significantly fewer resources in terms of machine hours, labor hours, setups, production orders, and shipments. This leads to a lower overhead cost per unit.
By employing ABC, Larner Corporation can more precisely determine the true cost of each product, enabling better pricing, budgeting, and strategic decisions. This method ensures that products are not undercosted or overcosted, which can significantly impact profitability and competitive positioning.