Question

Refer to the information in Exercise 17-1. Assume that the following information is available for the company’s two products for the first quarter of 2017.

	Deluxe Model	Basic Model
Production volume	10,000 units	30,000 units
Parts required	20,000 parts	30,000 parts
Parts required	250 batches	100 batches
Purchase orders	50 orders	20 orders
Invoices	50 invoices	10 invoices
Space occupied	10,000 square feet	7,000 square feet
Models	1 model	1 model

Required Compute activity rates for each activity and assign overhead costs to each product model using activity-based costing (ABC). What is the overhead cost per unit of each model?

Short answer

• Deluxe model = $41.25 per unit.
• Basic model = $11.46 per unit.

Step-by-step solution

Computing activity rates for Deluxe model

Deluxe model

Activity	Activity rate	Cost driver quantity	OH Allocated
Handling materials	$6.25 per part	20,000 parts	$125,000
Inspecting product	600.00 per batch	250 batches	150,000
Processing purchase orders	150.00 per order	50 orders	7,500
Paying suppliers	350.00 per invoice	50 invoices	17,500
Insuring the factory	7.50 per sq. ft.	10,000 square feet	75,000
Designing packaging	37,500 per model	1 model	37,5000
Total costs assigned (A)			$412,500
Units produced (B)			10,000 units
Overhead cost per unit			$41.25 per unit

Working note:

Calculating Overhead cost per unit

$$\begin{gathered} \text{Overhead}\text{cost}\text{per}\text{unit}=\frac{Totalcostassigned}{Unitsproduced} \\ =\frac{\$412,500}{10,000} \\ =\$41.25\text{per}\text{unit} \end{gathered}$$

Computing activity rates for Basic model

Activity	Activity rate	Cost driver quantity	OH Allocated
Handling materials	$6.25 per part	30,000 parts	$187,500
Inspecting product	600.00 per batch	100 batches	60,000
Processing purchase orders	150.00 per order	20 orders	3,000
Paying suppliers	350.00 per invoice	10 invoices	3,500
Insuring the factory	7.50 per sq. ft.	7000 square feet	52,500
Designing packaging	37,500 per model	1 model	37,500
Total costs assigned (A)			$344,000
Units produced (B)			30,000 units
Overhead cost per unit			$11.46 per units

Working note:

Calculating Overhead cost per unit

$$\begin{gathered} \text{Overhead}\text{cost}\text{per}\text{unit}=\frac{Totalcostassigned}{Unitsproduced} \\ =\frac{\$344,000}{30,000} \\ =\$11.46\text{per}\text{unit} \end{gathered}$$