A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools: Activity Cost Pool Budgeted Cost Product A Product B
Activity 1 $87,000 3,000 2,800
Activity 2 $62,000 4,500 5,500
Activity 3 $93,000 2,500 5,250

Annual production and sales level of Product A is 34,300 units, and the annual production and sales level of Product B is 69,550 units. What is the approximate overhead cost per unit of Product A under activity-based costing?

a. $3.00
b. $2.00
c. $10.28
d. $15.00
e. $2.33

a. $3.00

Explanation:

Calculation of activity rate for activity 1

Activity rate = Budgeted cost of activity 1/Total budgeted activity

=$87,000 / (3,000 + 2,800)

=$87,000/5,800

=$15  

Calculation of activity rate for activity 2.

Activity rate = Budgeted cost of activity 2 /Total budgeted activity

=$62,000 / (4,500+5,500)

=$62,000 / 10,000

=$6.20

Calculation of activity rate for activity 3

Activity rate = Budgeted cost of activity 3 / Total budgeted activity

=$93,000 / (2,500+5,250)

=$93,000 / 7,750

=$12

Calculation of total overhead cost of product A.

Total overhead cost = Activity1 + Activity2 + Activity3

Total overhead cost = (3,000×$15) + (4,500×$6.20) + (2,500×$12)

Total overhead cost = $45,000+$27,900+$30,000

Total overhead cost = $102,900

Thus, the total overhead cost allocated to product A is $102,900.

Calculation of overhead cost per unit.

Overhead cost per unit = Total overhead cost allocated / Number of units produced

= $102,900 / 34,300

= $3 per unit

Thus, the overhead cost per unit of product A is $3

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