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Practice Problem
1) A company needs an analysis to determine whether it should continue to use traditional overhead allocation or activity-based costing. The company uses common machinery to manufacture two simple products. Each year, two production runs for each product require a similar setup effort. Manufacturing overhead includes a setup cost of $50,400 per year. Total overhead for the company, including the setup cost, is $198,000 annually, and direct labor hours are expected to total 18,000 for the year.
The following information is available for products A and B:
Product A Product B
Units produced 1,000 8,000Direct material cost per unit $14 $14Direct labor cost per unit $24 $24Machine hours per unit 1 1Direct labor hours per unit 2 2
Required:
a. calculate the cost per unit for each product using traditional overhead allocation.
b. calculate the cost per unit for each product using activity-based costing. Please use direct labor hours for the "Other overhead" allocation pool.
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