Reference: 05-02
Addy Company Has Two Products: a and B

question 52

Multiple Choice

Reference: 05-02
Addy Company has two products: A and B. The annual production and sales of Product A are 1,700 units and of Product B are 1,100 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires
0.6 direct labour-hours per unit. The total estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as
follows: $$\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\hline \text { Activity 2 } & \$ 17,385 & 1,700 & 200 & 1,900 \\\hline \text { General Factory } & \$ 50,872 & 510 & 660 & 1,170 \\\hline \text { Total } & \$ 98,785 & & & \\\hline\end{array}$$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.)
-The overhead cost per unit of Product B under the traditional costing system is closest to:

• A)$5.49.
• B)$26.09.
• C)$11.45.
• D)$50.66.

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Definitions:

Bad Debt Expense

An expense account reflecting accounts receivable that a company does not expect to collect and is considered a loss.

Allowance for Doubtful Accounts

An accounting provision made for accounts receivable that may not be collectable.

Accounts Receivable

Funds that a company's clients have not yet paid for products or services that have already been provided to them.

Allowance Method

An accounting technique that estimates and sets aside a portion of a company's receivables as uncollectable, acknowledging potential credit losses.