Reference no: EM132510100

Cycle-Motion Co. manufactures bicycles and unicycles. The company is considering changing from traditional overhead allocation to activity-based costing. In the past year the company produced 2,000 bicycles and 500 unicycles, and incurred $178,100 of manufacturing overhead. The predetermined overhead rate is $17.81 per direct labour hour. Based on this rate, the unit cost of each item produced for the year included $71.24 of manufacturing overhead, resulting in the following unit costs:

Bicycles Unicycles

Direct materials $ 14.00 $ 17.00

Direct labour 18.00 22.00

Manufacturing overhead 71.24 71.24

Total $103.24 $110.24

The company controller analyzed the past year's overhead costs for cost pools and activity drivers. She discovered that the overhead could be assigned to three cost pools and applied to the product using the following activities:

Activity by product Overhead cost Activity driver Annual activity volume Bicycles Unicycles

Setups $30,000 Number of setups 75 60 15

Materials handling $80,600 Weight of materials (kg) 12,400 9,200 3,200

Equipment operations $67,500 Machine hours 45,000 25,000 20,000

Question 1: Assuming the activity-based costing is more accurate, which product was under-costed using the traditional allocation of manufacturing overhead, and by how much was it undercosted per unit?

a) Unicycles were under-costed by $3.36 per unit.

b) Bicycles were under-costed by $10.59 per unit.

c) Unicycles were under-costed by $42.36 per unit.

d) Bicycles were under-costed by $42.84 per unit