Activity-Based Costing Analysis for Latif Company

 

Activity-Based Costing Analysis for Latif Company

Latif Company uses activity-based costing to allocate overhead costs to its two products, A and B. To calculate the predetermined overhead rate (POHR) per activity and determine the overhead cost per unit for each product, we will follow these steps:

Estimated Total Cost and Expected Activity for Activity Cost Pools

– Activity Cost Pools:1. Activity 1: Estimated Cost $30,000, Expected Activity 5,000 units
2. Activity 2: Estimated Cost $20,000, Expected Activity 2,000 units
3. Activity 3: Estimated Cost $10,000, Expected Activity 1,000 units

Calculations:

1. Predetermined Overhead Rate (POHR) per Activity:

– Activity 1:
POHR Activity 1 = Estimated Cost / Expected Activity
POHR Activity 1 = $30,000 / 5,000 units
POHR Activity 1 = $6 per unit

– Activity 2:
POHR Activity 2 = Estimated Cost / Expected Activity
POHR Activity 2 = $20,000 / 2,000 units
POHR Activity 2 = $10 per unit

– Activity 3:
POHR Activity 3 = Estimated Cost / Expected Activity
POHR Activity 3 = $10,000 / 1,000 units
POHR Activity 3 = $10 per unit

2. Overhead Cost per Unit for Each Product:

For Product A (producing 1,000 units):

– Total Overhead Cost for Product A = (POHR Activity 1 * Units) + (POHR Activity 2 * Units) + (POHR Activity 3 * Units)
– Total Overhead Cost for Product A = ($6 * 1,000) + ($10 * 1,000) + ($10 * 1,000)
– Total Overhead Cost for Product A = $6,000 + $10,000 + $10,000
– Total Overhead Cost for Product A = $26,000

Overhead Cost per Unit for Product A = Total Overhead Cost for Product A / Units of Product A
Overhead Cost per Unit for Product A = $26,000 / 1,000 units
Overhead Cost per Unit for Product A = $26 per unit

For Product B (producing 500 units):

– Follow the same steps as above with the relevant predetermined overhead rates.

By applying activity-based costing principles and calculating the predetermined overhead rates per activity and the overhead cost per unit for each product, Latif Company can accurately allocate overhead costs and make informed pricing and production decisions.