Problem 7-21 Comparing traditional and ABC costs

Name:

Course:

Date:

Ellis Perry is an electronics components manufacturer. Information about the companys two products follows:

AM-2

FM-9

Units produced

15,000

2,000

Direct labor hours required for production

15,000

14,000

Units per batch

3,000

50

Shipping weight per unit

0.5 lbs.

4 lbs.

The company incurs $899,000 in overhead per year and has traditionally applied overhead on the basis of direct labor hours.

Required

a.

How much overhead will be allocated to each product using the traditional direct labor hours allocation base? What overhead cost per unit will be allocated to each product?

Here's one way you could solve this problem:

Overhead Rate

=

Estimated Overhead

=

[Figure]

=

[Formula]

Estimated Cost Driver

[Figure]

AM-2

FM-9

Total overhead to product

[Formula]

[Formula]

Number of units produced

[Figure]

[Figure]

=

Overhead per unit

[Formula]

[Formula]

Or solve your own way:

b.

Assume that Ellis Perry has identified three activity cost pools.

Pool

Cost

Cost Driver

Assembly

$638,000

Direct labor hours

Setup

121,500

Number of setups (1 per batch)

Packaging

139,500

Weight

Given these activity pools and cost drivers, how much overhead should be allocated to each product? What overhead cost per unit will be allocated to each product?

Solve:

c.

Explain the change in overhead costs per unit.

Answer: