XYZ Manufacturing utilizes a traditional cost accounting system and produces two products X and Z. During 2017 the organization produced and sold 2,100,000 units of product X and 900,000 units of product Z. The table below reflects the direct costs assigned to the two products.

	Product X	Product Z
Units produced and sold	2,100,000	900,000
Direct labor cost per unit	$0.50	$0.50
Direct material cost per unit	$0.75	$0.50

XYZ currently uses direct labor cost to allocate overhead to each of its products. Overhead costs are composed of the following components with the following amounts incurred in 2017.

Overhead component	Overhead Amount
Materials purchasing	$180,000
Machine setups	375,000
Product packaging	280,000
Machine testing and calibration	300,000
Machine maintenance and cleaning	287,000
Total	$1,422,000

Question

Calculate the overhead application rate under the traditional cost accounting system that uses direct labor cost as the cost driver. Determine the total amount of overhead to be charged to each unit of Product X and Product Z. Determine the total cost per unit of Product X and Product Z using the traditional cost accounting system.

XYZ Manufacturing has been concerned that the current cost accounting system is not providing them with appropriate information for product pricing decisions. The plant accountant has spent time gathering information about the components of overhead and captured the following information about the cost drivers for each component, and the breakdown of the cost driver used for each product during 2017

Overhead component	Cost Driver	Cost Driver Units	Product X Cost Driver Units	Product Z Cost Driver Units
Materials purchasing	Number of purchase orders	100	25	75
Machine setups	Number of setups	250	100	150
Product packaging	Number of packages	1,400,000	500,000	900,000
Machine testing and calibration	Number of tests	3,000	2,000	1,000
Maintenance and cleaning	Number of batches	250	50	200

Questions

Calculate the total amount of overhead allocated to each of the Products (X and Z) using the information gathered for activity-based costing. Calculate the overhead allocated per unit based on the number of units of each product produced. Calculate the total product cost for each unit of Product X and Z.

The company has charged a selling price per unit for Product X of $3.00 per unit and for Product Z of $2.00 per unit. Determine the gross profit for each unit of Product X and Product Z using traditional product costing with the single factor to allocate overhead. (Note: gross profit is the difference between the selling price per unit and the total cost of producing each unit.)

Using the same selling price per unit in requirement 3 determine the gross profit for each unit of Product X and Product Z using activity based costing.

If the company converts to activity based costing would you recommend that the company set a different selling price per unit? Explain the rationale for your recommendation?