Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $756,000 in overhead costs would be incurred and the company would produce and sell 3,000 units of the flexible model and 15,000 units of the regular model. The flexible model requires 2.4 hours of direct labor time per unit, and the regular model requires 1.20 hours. Direct materials and labor costs per unit are given below:

	Flexible			Rigid
Direct materials cost per unit	$	105		$	60
Direct labor cost per unit	$	45		$	30

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

				Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost			Flexible			Rigid			Total
Purchase orders (number of orders)	$	28,000			125			435		560
Rework requests (number of requests)		18,000			55			305		360
Product testing (number of tests)		250,000			850			1,150		2,000
Machine related (machine-hours)		460,000			1,100			4,650		5,750
	$	756,000

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

Answer 1

(1a) Predetermined Overhead Rate = Estimated OH Cost/Total Direct Labor Hours

Estimated OH Cost = $756000

Total DL Hours = (3000 units * 2.4 hours) + (15000 units * 1.20 hours) = 25200 hours

OH Rate = $756000/25200 = $30 per hour

(1b) Unit Product Cost:-

	Flexible	Rigid
Direct materials cost per unit	$105	$60
Direct labor cost per unit	$45	$30
Overhead cost per unit	(2.4 hours * $30) =$72	(1.2 hours * $30) =$36
Unit Product Cost	$222	$126

(2)

Activity Cost Pool	Estimated OH Cost (A)	Total Expected Activity (B)	Activity Rate (A/B)
Purchase orders	$28000	560	$50	Per order
Rework requests	$18000	360	$50	Per request
Product testing	$250000	2000	$125	Per test
Machine related	$460000	5750	$80	Per MH
	$756000

(3a) Total amount of OH assigned:-

	Flexible	Rigid
Purchase orders	($50 * 125) =$6250	($50 * 435) =$21750
Rework requests	($50 * 55) =$2750	($50 * 305) =$15250
Product testing	($125 * 850) =$106250	($125 * 1150) =$143750
Machine related	($80 * 1100) =$88000	($80 * 4650) =$372000
	$203250	$552750

(3b)

	Flexible	Rigid
Direct materials cost per unit	$105	$60
Direct labor cost per unit	$45	$30
Overhead cost per unit	($203250/3000 units) =$67.75	($552750/15000 units) =$36.85
Unit Product Cost	$217.75	$126.85