Question

Palmer Company uses activity-based costing. The company produces two products: Earbuds and Head phones. The annual production and sales volume of Earbuds is 8,000 units and of Head phones is 6,000 units. There are three activity cost pools with the following expected activities and estimated total costs:

Activity Cost Pool Estimated Cost Expected Activity IPods Expected Activity MP3 players Total
Activity 1 $20,000 100 400 500
Activity 2 $37,000 800 200 1,000
Activity 3 $91,200 800 3,000 3,800

Using ABC, the cost per unit of IPods is approximately: __________

Answer 1

Assuming  the sales volume of Earbuds is 8,000 units Using ABC, the cost per unit of IPods is approximately $6.60.

Cost per unit

First step

Activity Rate :

Activity cost= ( Estimated Cost / Total Activity)

Activity 1 20,000/500=40

Activity 2 37,000/ 1,000=37

Activity 3 91,200/ 3,800= 24

Second step

Allocated Cost to Ipods

Allocated Cost= ( Activity Rate× Expected Activity for IPods)

Activity 1  40×100=4,000

Activity 2 37×800=29,600

Activity 3 24× 800=19,2000

Total Allocated Cost 52,800

Third step

Cost Per Unit =Total Allocated Cost / Total Units of Ipods

Cost Per Unit = $ 52,800 / 8,000 Units

Cost Per Unit = $6.60 per unit

Inconclusion the cost per unit of IPods is approximately $6.60.

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