MNO uses activity based costing where overhead from three di

MNO uses activity based costing where overhead from three different cost centers are allocated to products based upon the following:

Activity Driver Overhead Costs                                   Product A                                Product B

Setup                       Production Runs $100,000 80 productions runs 20 production runs

Inspection           Inspection Hours $300,000 200 hours                               100 hours

Machining            Machine Hours $800,000 5,000 hours                          3,000 hours

Raw materials are directly followed to each product and the amount of raw materials used for Product A was $300,000 and for Product B was $200,000. Direct labor is directly followed to each product and the amount of direct labor used for product A was $100,000 and for product B was $50,000. There were 12,000 units of product A manufactured and 10,000 units of product B manufactured.

1. Calculate the total unit cost of making product A and product B using ABC. Show computations.

2. If MNO uses one plant wide rate to allocate all the overhead based upon direct labor direct labor hours and product A used 20,000 direct labor hours and product B used 10,000 direct labor hours calculate the total unit cost of product A and product B.

Solution

a) Calculation of Unit Cost under ABC Costing System:

Working Note 1: Calculation of cost per cost driver

Calculation of Unit Cost of each Product

b) Calculation of Unit Cost under One Plant Wide Rate:

Total Overheads= $1200000

Total Labour Hours= 30000

Overhead per Labour Hour= $40