Question

Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,172,900 in manufacturing overhead cost and produce 16,000 units of the deluxe model and 115,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows: Model Deluxe Regular $ 145 $ 110 $ 13 $ 7 Direct materials Direct labor Required: 1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. 1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. 2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity- based system would have the following four activity cost pools:

Answer 1

Total Budgeted Labor hours = 16,000*1 + 115,000*0.5 = 73,500 hours

1-a Predetermined rate = Budgeted Overheads/Budgeted Hours

= 6,172,900/73,500

= $83.99 per hour

1-b Unit product cost:

	Deluxe	Regular
Direct Material	145	110
Direct Labor	13	7
Overhead	83.99	42
Unit Cost	$241.99	159

2.Activity rate = Overhead/Total Activity

Purchase Orders = 308,700/1,260 = $245

Processing = 4,165,000/49,000 = $85

Scrap = 511,200/720 = $710

Shipping = 1,188,000/13,200 = $90

3-a Overhead

Deluxe = 420*245+19600*85+400*710+5,280*90 = $2,528,100

Regular = 840*245+29400*85+320*710+7920*90 = $3,644,800

Per Unit

Deluxe = 2,528,100/16000 = $158

Regular = 3,644,800/115,000 = 31.69

b Unit product cost:

	Deluxe	Regular
Direct Material	145	110
Direct Labor	13	7
Overhead	158	31.69
Unit Cost	316	148.69