Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,600 units of Basic Product and 1,200 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.4 direct labor hours per unit and Deluxe Product requires 0.8 direct labor hours per unit. The total estimated overhead for next period is $98,935.

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:

Estimated Expected Activity
Activity Cost Pool Overhead Costs Basic Product Deluxe Product Total
Activity 1 $ 30,552 1,200 800 2,000
Activity 2 17,415 1,900 400 2,300
General Factory 50,918 450 660 1,110
Total $ 98,885
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)

The overhead cost per unit of Deluxe Product under the activity-based costing system is closest to:

$42.99.

$27.52.

$38.63.

$41.39.

Per unit is closest to $ 38.63

Explanation:

Computation of Overhead costs

Activity 1 overhead costs on Product Deluxe

Total Costs                                       $ 30,552

Total on Product Basic                          1,200

Total on Product Deluxe                           800

Total on Product Deluxe = 800/2000 * $ 30,552                        $ 12,221

Activity 2 overhead costs on Product Deluxe

Total Costs                                       $ 17,415

Total on Product Basic                         1,900

Total on Product Deluxe                         400

Total on Product Deluxe = 400/2300 * $ 17,415                          $  3,029

General Factory Activity overhead costs on Product Deluxe

Total Costs                                                   $ 50,918

Total on Product Basic  ( 1,600 units *.4)             640                        

Total on Product Deluxe ( 1,200 units * .8)           960

Total on Product Deluxe = 960/1600 * $ 50,918                       $  30.131

Total Overheads on Product Deluxe on activity based             $  45,380

Total production of Product Deluxe                                                   1,200

Per  unit cost of production Deluxe                                              $ 37.82

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