Chapter 2.A, Problem 4P

PROBLEM 2A-4 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2-5

Ellix Company manufactures two models of ultra-high fidelity speakers-the X200 model and the X99 model. Data regarding the two products follow:

Additional information about the company follows:

1. Model X200 requires $72 in direct materials per unit, and model X99 requires S50.
2. The direct labor workers are paid S20 per hour.
3. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.
4. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.
5. Because of the special work required in (d) above, the company is considering the use of activity-based absorption costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

Estimated Total Activity

Activity Cost Pool	Activity Measure	Estimate Total Cost	X200	X99	Total
Machine setups	Number of setups	$ 360,000	50	100	150
Special processing….	Machine-hours	180,000	12,000	0	12,000
General factory	Direct labor-hours	1,260,000	9,000	27,000	36,000

$1,800,000

Required:

1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.
1. Compute the plantwide predetermined overhead rate.
2. Compute the unit product cost of each model.
2. Assume that the company decides to use activity-based absorption costing to apply' overhead cost to products.
1. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity- based approach.
2. Compute the unit product cost of each model.
3. Explain why overhead cost shifted from the high-volume model to the low-volume model under the activity-based approach.