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Addy Company makes two products: Product A and Product B. Annual production and sales are 1,700 units of Product A and 1,100 units of Product B. The c...

Question:

 Addy Company makes two products: Product A and Product B. Annual production and sales are 1,700 units of Product A and 1,100 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $98,785.

 

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. 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:

                                                          Estimated                        Expected Activity        

                                                           Overhead                                 Product

                Activity 1                   Costs        Product A       B                    Total

   Activity 1                                $30,528     1,000           600                 1,600

   Activity 2                                 17,385      1,700           200                 1,900

   General Factory                        50,872        510            660                 1170

    Total                                     $98,785    (Note: The General Factory activity cost pool\'s costs are allocated on the basis of direct labor-hours.)

                The predetermined overhead rate under the traditional costing system is closest to:

a)            $9.15

b)            $19.08

c)            $84.43

d)            $43.48

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