7-21 Comparing traditional and ABC costs (LO 2, 3) Ellis Perry is an electronics
components manufacturer. Information about the company’s two products follows:
Units produced 15,000 2,000
Direct labor hours required for production 15,000 14,000
Units per batch 3,000 50
Shipping weight per unit 0.5 lbs. 4 lbs.
The company incurs $899,000 in overhead per year and has traditionally applied overhead
on the basis of direct labor hours.
a. How much overhead will be allocated to each product using the traditional direct
labor hours allocation base? What overhead cost per unit will be allocated to each
b. Assume that Ellis Perry has identified three activity cost pools.
Pool Cost Cost Driver
Assembly $638,000 Direct labor hours
Setup 121,500 Number of setups (1 per batch)
Packaging 139,500 Weight
Given these activity pools and cost drivers, how much overhead should be allocated to
each product? What overhead cost per unit will be allocated to each product?
c. Explain the change in overhead costs per unit.