Question 5

Channel Products Ltd manufactures two types of product, standard and luxury. Because production is automated, overhead is allocated according to machine hours. Information regarding the two products and overhead costs is as follows:

Total overhead		$75,000
Machine hours	-	Standard	5,000
	-	Luxury	5,000
Units produced	-	Standard	10,000
	-	Luxury	5,000

A more detailed analysis reveals the following:

Activities	Budgeted overhead costs	Cost driver
Set-ups	$ 5,000	Number of set-ups
Machining	$40,000	Machine hours
Materials handling	$10,000	Material requisitions
packing	$20,000	Orders packed

Product	Set-ups	Machine hours	Material requisitions	Orders packed
Standard	50	5,000	50	100
Luxury	100	5,000	100	200

Required:

1. Calculate the overhead cost per unit for each product using the traditional costing system with machine hours as the overhead base.
2. Calculate the overhead cost per unit for each product using an activity based costing system.