A company has two products: A and B. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools: 95,000 70,000 109,000.

Budgeted Activity

Activity Cost Budgeted Product A Product B

Pool Cost

Activity 1 $95,000 3,800 3,600

Activity 2 $70,000 5,300 6,300

Activity 3 $109,000 3,300 6,050

Annual production and sales level of Product A is 35,100 units, and the annual production and sales level of Product B is 70,350 units. What is the approximate overhead cost per unit of Product B under activity-based costing?

a. $3.40

b. $2.20

c. $10.28

d. $12.84

e. $1.87

Unitary overhead cost = $2.2

Explanation:

Giving the following information:

Activity Cost Budgeted Product A Product B

Activity 1 $95,000 3,800 3,600

Activity 2 $70,000 5,300 6,300

Activity 3 $109,000 3,300 6,050

The annual production and sales level of Product B is 70,350 units.

First, we need to calculate the predetermined overhead rate for each activity cost pool. We will use the following formula:

Predetermined manufacturing overhead rate = total estimated overhead costs for the period / total amount of allocation base

Activity 1 = 95,000 / (3,800 + 3,600) = $12.84

Activity 2 = 70,000 / (5,300 + 6,300) = $6.03

Activity 3 = 109,000 / (3,300 + 6,050) = $11.66

Now, we need to calculate the total allocated overhead for product B:

Allocated MOH = Estimated manufacturing overhead rate * Actual amount of allocation base

Product B = 12.84*3,600 + 6.03*6,300 + 11.66*6,050 = $154,756

Unitary overhead cost = 154,756/70,350 = $2.2