Company ABC has a production line that produces two products, A and B. The company uses a traditional costing system, allocating overhead costs based on direct labor hours. The following information is available for the month of January:

• Product A: 1,500 units produced, 4,000 direct labor hours, $5,000 of direct materials, and $6,000 of manufacturing overhead allocated
• Product B: 2,500 units produced, 3,000 direct labor hours, $7,500 of direct materials, and $7,000 of manufacturing overhead allocated
• Total manufacturing overhead incurred for the month is $20,000

The company is considering switching to an activity-based costing system to allocate overhead costs. The company identified three activities that drive overhead costs: machine setup, material handling, and quality control. The following information is available for the month of January:

• Machine setup activity: 50 setups performed, $7,500 of costs incurred
• Material handling activity: 10,000 pounds of materials handled, $4,000 of costs incurred
• Quality control activity: 100 inspections performed, $8,500 of costs incurred

Determine the overhead cost per unit for each product using both the traditional costing system and the activity-based costing system. Discuss the advantages and disadvantages of each costing system.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Overhead cost per unit using traditional costing system First we need to calculate the predetermined overhead rate by dividing the total ma... View the full answer