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Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information:Activity Cost Driver Amount M XYProduction setups Number of setups $ 80,000 15 35Material handling Number of parts 55,000 54 36Packaging costs Number of units 249,000 96,000 64,000    $ 384,000    What is the total overhead per unit allocated to Product M using activity-based costing (ABC)?Note: Do not round intermediate calculations; round your final answer to the nearest cent.Multiple Choice

Question

Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information:Activity Cost Driver Amount M XYProduction setups Number of setups 80,0001535MaterialhandlingNumberofparts55,0005436PackagingcostsNumberofunits249,00096,00064,000   80,000 15 35Material handling Number of parts 55,000 54 36Packaging costs Number of units 249,000 96,000 64,000    384,000    What is the total overhead per unit allocated to Product M using activity-based costing (ABC)?Note: Do not round intermediate calculations; round your final answer to the nearest cent.Multiple Choice

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Solution

To calculate the total overhead per unit allocated to Product M using activity-based costing (ABC), we need to follow these steps:

  1. Calculate the cost per cost driver for each activity.
  2. Multiply the cost per cost driver by the number of cost drivers for Product M.
  3. Add up all the overhead costs allocated to Product M.
  4. Divide the total overhead costs by the number of units of Product M to get the overhead cost per unit.

Let's do the calculations:

  1. Cost per cost driver:

    • Production setups: 80,000/(15setupsforM+35setupsforXY)=80,000 / (15 setups for M + 35 setups for XY) = 1,600 per setup
    • Material handling: 55,000/(54partsforM+36partsforXY)=55,000 / (54 parts for M + 36 parts for XY) = 500 per part
    • Packaging costs: 249,000/(96,000unitsforM+64,000unitsforXY)=249,000 / (96,000 units for M + 64,000 units for XY) = 1.5 per unit

  2. Overhead costs for Product M:

    • Production setups: 15 setups * 1,600persetup=1,600 per setup = 24,000
    • Material handling: 54 parts * 500perpart=500 per part = 27,000
    • Packaging costs: 96,000 units * 1.5perunit=1.5 per unit = 144,000

  3. Total overhead costs for Product M: 24,000(setups)+24,000 (setups) + 27,000 (material handling) + 144,000(packaging)=144,000 (packaging) = 195,000

  4. Overhead cost per unit for Product M: 195,000/96,000units=195,000 / 96,000 units = 2.03

So, the total overhead per unit allocated to Product M using activity-based costing (ABC) is $2.03.

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