Question

Murphy Company produces two products, Regular and Enhanced. Murphy produces 8,000 units of Regular and 2,000 units of Enhanced. The company uses two activity cost pools, with estimated cost and activity as follows: Pool Estimated Cost Regular Enhanced #1 $12,000 500 hours 250 hours #2 $24,000 400 hours 1,200 hours What is the overhead cost per unit of Enhanced under activity-based costing?

Answer 1

Answer:

$11.00 per unit.

Explanation:

We know,

Total overhead cost = Estimated cost for pools × (Expected activity of specific activity ÷ Total expected activity)

Given,

Estimated cost for pool 1 = $12,000

Estimated cost for pool 2 = $24,000

Total expected activity for pool 1 = Regula + Enhanced = 500 + 250 hours = 750 hours

Total expected activity for pool 2 = Regula + Enhanced = 400 + 1,200 hours = 1,600 hours

As we have to find the overhead cost per unit of Enhanced,

Therefore, Total overhead cost = [$12,000 × (250 ÷ 750)] + [$24,000 × (1,200 ÷ 1,600)] = $4,000 + 18,000 = $22,000

Again, we know,

the overhead cost per unit under ABC costing = Total overhead cost ÷ Number of units produced for a specific unit

Cost per unit of Enhanced products = $22,000 ÷ 2,000 units = $11 per unit.