Question

Exercise 4-10 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

	Xactive			Pathbreaker
Direct materials per unit	$	65.20		$	51.40
Direct labor cost per unit	$	18.60		$	13.40
Direct labor-hours per unit		1.4	DLHs		1	DLHs
Estimated annual production and sales		29,000	units		79,000	units

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$2,439,840
Estimated total direct labor-hours	119,600	DLHs

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

2. The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

	Estimated Overhead Cost			Expected Activity
Activity Cost Pools and Activity Measures				Xactive			Pathbreaker			Total
Supporting direct labor (direct labor-hours)	$	891,020			40,600			79,000		119,600
Batch setups (setups)		836,000			270			170		440
Product sustaining (number of products)		632,360			1			1		2
General factory (machine-hours)		80,460			2,900			7,900		10,800
Total manufacturing overhead cost	$	2,439,840

Determine the activity rate for each of the four activity cost pools.

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

Answer 1

Solution 1a:

Predetermined overhead rate = $2439840/ 119600 = $20.40 per DLH

Solution 1b:

Computation of Unit Product Cost Xactive Pathbreaker Direct material $65.20 $51.40 8 Direct Labor $18.60 $13.40 9 Manufacturing overhead (Hours per unit*$20.40) $28.56 $20.40 10 $112.36 11 Unit product cost 12 $85.20 13 14 15. et354 Sheet355 Sheet303 (2) Sheet357 Sheet26 (5) Sheet15 (3) Sheet359 Sheet329

Solution 2:

Activity cost pool Supporting Direct Labor Batch Setups Product Sustaining General Factory Computation of Activity rates Overhead costs Total Activity $891,020 119600 $836,000 $632,360 2 $80,460 10800 440 Activity Rate $7.45 Per DLH $1,900.00 Per setup $316,180.00 Per Product $7.45 Per machine hour ] 20.40000 11 Total $2,439,840 14 16 Activity cost pool Supporting Direct Labor Batch Setups Product Sustaining General Factory Allocation of Overhead to products Xactive Activity usage Overhead Allocated 40600 $302,470 270 $513,000 1 $316, 180 2900 $21,605 Activity Rate $7.45 $1,900.00 $316,180. 00 $7.45 17 18 Pathbreaker Activity usage Overhead Allocated 79000 $588,550 170 $323,000 1 $316,180 7900 $58,855 19 20 21 22 23 24 Total overhead allocated / Units of production Overhead cost Per unit $1,153,255 29000 39.77 $1,286,585 79000 16.29 et354 Sheet355 Sheet303 (2) Sheet357 Sheet26 (5) Sheet15 (3) Sheet359 Sheet329

Solution 3:

M N O P 17 Computation of Unit Product Cost Xactive 18 Direct material $65.20 19 Direct Labor $18.60 | 20 Manufacturing overhead allocated per unit $39.77 21 22 Unit product cost $123.57 Pathbreaker $51.40 $13.40 $16.29 $81.09 23 24 25 26 27 28 29 30 31 32 33 34 35 36 et354 Sheet355 Sheet303 (2) Sheet357 Sheet26 (5) Sheet15 (3) Sheet359 Sheet329