Question

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 52,000 units of EX300 and 11,700 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: EX300 TX500 Total Direct materials $ 358,325 $ 154,550 $ 512,875 Direct labor $ 112,000 $ 38,500 $ 150,500 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below: Activity Activity Cost Pool (and Activity Measure) Manufacturing Overhead EX300 TX500 Total Machining (machine-hours) $ 161,575 82,000 58,500 140,500 Setups (setup hours) 81,600 35 220 255 Product-level (number of products) 77,390 1 1 2 General factory (direct labor dollars) 40,635 $ 112,000 $ 38,500 $ 150,500 Total manufacturing overhead cost $ 361,200 Required: 1-a. Compute the plantwide overhead rate that would be used in the company’s conventional cost system. 1-b. Using the plantwide rate, compute the unit product cost for each product. 2-a. Compute the activity rate for each activity cost pool. 2-b. Using the activity rates, compute the unit product cost for each product.

Answer 1

1-a.

Plantwide overhead rate = Estimated manufacturing overhead cost / direct labor dollars

Plantwide overhead rate = $361,200 / 150,500 = $2.4

1-b.

	EX300	TX500
Direct material	$358,325	$154,550
Direct labor	112,000	38,500
Manufacturing overhead	268,800 (112,000*$2.4)	92,400 (38,500*$2.4)
Total product cost	$739,125	$285,450
Unit product cost	$14.2 (739,125/52,000)	$24.4 (285,450/11,700)

2-a.

Activity cost pool	Manufacturing overhead		Activity rate
Machining	$161,575	140,500	$1.15
Setups	81,600	255	320
Product level	77,390	2	38,695
General factory	40,635	150,500	0.27
Total	$361,200

2-b.

	EX300	TX500
Direct material	$358,325	$154,550
Direct labor	112,000	38,500
Manufacturing overhead
Machining	94,300 (82000*$1.15)	67,275 (58500*$1.15)
Setups	11,200 (35*$320)	70,400 (220*$320)
Product level	38,695	38,695
General factory	30,240 (112,000*$0.27)	10,395 (38,500*$0.27)
Total product cost	$644,760	$379,815
Unit product cost	$12.4 (644,760/52,000)	$32.5 (379,815/11,700)