Question

Astra Inc. manufactures widgets and gadgets. Astra expect to manufacture 300 widgets and 800 gadgets. Widgets require 5 direct labor-hours per unit, and gadgets require 2 direct labor-hours (DLH) per unit. Astra currently applies overhead using traditional costing using direct labor hours as the cost driver. Total estimated overhead is $426,000. However, they are now considering switching to activity-based costing (ABC) with the following cost pools, activity measures and expected activity. Labor related cost pool with estimated overhead of $280,000 to be applied using DLHs. Order size cost pool with estimated overhead of $146,000 to be applied using machine hours (MHs). They expect to use 5,100 MHs for widgets and 3,900 MHs for gadgets. Which of the following statements concerning Widgets is true? (Round intermediate calculations to 2 decimal places.) Group of answer choices

The unit product cost under traditional costing is greater than its unit product costing under ABC by approximately $15.11.
The unit product cost under traditional costing is greater than its unit product costing under ABC by approximately $24.59.
The unit product cost under traditional costing is less than its unit product costing under ABC by approximately $40.29.
The unit product cost under traditional costing is less than its unit product costing under ABC by $19.21.
The unit product cost under traditional costing is greater than its unit product costing under ABC by $19.21.

Answer 1

The unit product cost under traditional costing is greater than its unit product costing under ABC by approximately $19.21.

Step-by-step explanation:

Activity Based Costing ABC is the method which identify each activity and assigns the cost to each activity.

To calculate Widget cost per unit using traditional costing is;

Overhead / Direct labor hours

Direct labor hours for Widgets = 300 Widgets * 5 direct labor hours per Widget = 1500 labor hours

$426,000 / 1500 labor hours = $284 / direct labor hour

Using activity based costing;

Overhead absorbed based on machine hours;

$146,000 / 5,100 machine hours = $28.63 per machine hour

Overhead absorbed based on labor hours;

$280,000 / 1500 labor hours = $186.66

Total per unit cost of Widget = $215.30