Determine the per unit cost from the given data.
Erte, Inc., manufactures two models of high pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:
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Products
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Direct labor-hours
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Annual production
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Total Direct labor-hours
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|
XR7
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0.2 DLHs per unit
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20,000 units
|
4,000 DLHs
|
|
ZD5
|
0.4 DLHs per unit
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40,000 units
|
16,000 DLHs
|
|
|
|
|
20,000 DLHs
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Additional information about the company follows:
a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $25.
b. The direct labor rate is $20 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. Manufacturing overhead totals $1,480,000 per year.
d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling machine.
e. Because of the special work required in (d) above, the company is considering the use of activity-based costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:
Explain why overhead cost shifted from the high-volume product to the low-volume product under activity-based costing.