ExpertHard1 markMultiple Choice
CPA · Question 08 · Area I: Business Analysis
A company uses Activity-Based Costing (ABC). It has two products: Standard and Custom. <br/>Total estimated overhead: $500,000.<br/>Activity Pool 1 (Setup): $200,000 cost, driven by number of setups (Total 100 setups: 20 Standard, 80 Custom).<br/>Activity Pool 2 (Machining): $300,000 cost, driven by machine hours (Total 10,000 hours: 8,000 Standard, 2,000 Custom).<br/><br/>If the company produces 1,000 units of the Custom product, what is the overhead cost per unit for the Custom product?
A company uses Activity-Based Costing (ABC). It has two products: Standard and Custom. <br/>Total estimated overhead: $500,000.<br/>Activity Pool 1 (Setup): $200,000 cost, driven by number of setups (Total 100 setups: 20 Standard, 80 Custom).<br/>Activity Pool 2 (Machining): $300,000 cost, driven by machine hours (Total 10,000 hours: 8,000 Standard, 2,000 Custom).<br/><br/>If the company produces 1,000 units of the Custom product, what is the overhead cost per unit for the Custom product?
Answer options:
A.
$250.00
B.
$160.00
C.
$220.00
D.
$22.00
How to approach this question
Step 1: Calculate rate for each pool. Step 2: Allocate costs to Custom product based on its usage. Step 3: Divide total allocated cost by number of units.
Full Answer
C.$220.00✓ Correct
Setup Cost allocated to Custom = (80/100) * $200,000 = $160,000.<br/>Machining Cost allocated to Custom = (2,000/10,000) * $300,000 = $60,000.<br/>Total Custom Overhead = $220,000.<br/>Cost per unit = $220,000 / 1,000 = $220.
Common mistakes
Allocating based on units produced instead of activity drivers; forgetting to divide by the number of units at the end.
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