Question

Exercise 4-4 Contrast ABC and Conventional Product Costs (L04-4] Pacifica Industrial Products Corporation makes two products, Product Hand Product L. Product H is expected to sell 47,000 units next year and Product L is expected to sell 9,400 units. A unit of either product requires 0.9 direct labor-hours. The company's total manufacturing overhead for the year is expected to be $4,314,600. Required: 1-a. The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product? 1-b. Compute the total amount of overhead cost that would be applied to each product. 2. Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $2,157,300 assigned to Product Hand $2,157,300 assigned to Product L. If this suggestion is followed, how much overhead cost per unit would be assigned to each product?

Answer 1

1a
Total manufacturing overhead	4314600
Divide by Total direct labor hours	50760	=(47000+9400)*0.90
Overhead rate	85
Overhead cost per unit	76.50	=85*0.90
	Product H	Product L
Overhead cost per unit	76.50	76.50
1b
Total overhead:
Product H	3595500	=76.50*47000
Product L	719100	=76.50*9400
	Product H	Product L	Total
Total overhead cost	3595500	719100	4314600
2
	Product H	Product L
Overhead cost per unit	45.90	229.50
	=2157300/47000	=2157300/9400