Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 36

Activity-based costing
Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities-production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:

The activity-base usage quantities for each product are as follows:

a. Determine an activity rate for each activity.
b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a).
c. Assume that each product required one direct labor hour per unit. Determine the per- unit cost if factory overhead is allocated on the basis of direct labor hours.
d. Explain why the answers in parts (b) and (c) are different.