Chapter 4A, Problem 4A.4P

Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO3-5

Elix 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 S72 in direct materials per unit, and model X99 requires $50.
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:

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.