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Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: Activity Cost Driver Amount M XY Production setups Number of setups $82,000 8 12 Material handling Number of parts 48,000 56 24 Packaging costs Number of units 130,000 80,000 50,000 $260,000 What is the total overhead per unit allocated to Product M using activity-based costing (ABC)

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Answer:

Unitary cost= $1.83

Explanation:

First, we need to calculate the allocation rates:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Production setups= 82,000/20= $4,100 per setup

Material handling= 48,000/80= $600 per part  

Packaging costs= 130,000/130,000= $1 per unit

Now, we allocate cost to Product M:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Production setups= 4,100*8= 32,800

Material handling= 600*56= 33,600  

Packaging costs= 1*80,000= 80,000

Total= $146,400

Finally, the unitary cost:

Unitary cost= 146,400 / 80,000

Unitary cost= $1.83

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