Average Cost of Product Accounting Need Help

Question

Broadway Corporation has provided the following data from its activity-based costing system:
Activity: Assembly Total Cost : $942,480 Total Activity : 66,000 Machine Hours

Activity : Processing Orders Cost : $85,050 Total Activity : 1,800 orders

Activity : Inspection Cost : $126,854 Total Activity : 1,820 inspection hours

 

The company makes 430 units of product O37W a year, requiring a total of 690 machine hours, 40 orders, and 10 inspection hours a year. The product's direct materials cost is $35.72 per unit and its direct labor cost is $29.46 per unit. According to the activity based costing system, the average cost of product O37W is closest to :

A) $94.11 per unit B) $28.93 per unit C) $131.23 per unit D) $61.53 per unit E) $83.98 per unit

 

Answer was A) but I don't get how , please show help with steps.

 

Thanks :)

Answer 1

Here's how to do this. I will list each step with brief explanation:

 

1.Calculate the cost of each machine hour

942,480/66,000=14.28 per machine hour

 

2. Calculate the cost of each order

85050/1800=47.25 per order

 

3. Calculate the cost of each inspection hour

126854/1820=69.70 per inspection hour

 

It is given in the problem that it takes 690 machine hours, 40 orders, and 10 inspection hours a year to make 430 units. So we need to take the answers calculated above and multiply by these amounts. So for instance I will take the answer calculated in #1 above and multiply it by the 690 total machine hours. I will take the answer calculated in #2 and multiply it by the 40 total orders and I will take the answer in #3 above and multiply it by the 10 total inspection hours.

I make these calculations below.

 

1. 14.28*690=9853.20

2. 47.25*40=1890

3. 69.70*10=697

 

Now, I sum the answers that were just calculated:

9853.20+1890+697=12440.20

 

Therefore, 12440.20 is the cost of producing 430 units when considering only the machine hour costs, order costs, and inspection costs. If I divide 12440.20 by the 430 units I get 28.93 which is the per unit costs associated with all of these activities. Now I add in the direct material cost of 35.72 per unit and the direct labor cost of 29.46 per unit (both of these are given in the problem) to the 28.93 which was just calculated to arrive at the total cost per unit which is 94.11 (35.72+29.46+28.93=94.11).

 

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