Question

For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.80 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.60 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:

	LEC 40		LEC 90
Direct materials	$	30.00	$	50.00
Direct labor (0.60 hours and 0.80 hours @ $10.00 per hour)	$	6.00	$	8.00

Management estimates that the company will incur $960,000 in manufacturing overhead costs during the current year and 50,000 units of the LEC 40 and 25,000 units of the LEC 90 will be produced and sold.

3. Using the activity rates you computed in part (2), do the following:

a. Determine the per unit amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system.

b. Compute the unit product cost of each product.

Answer 1

Allocation of Activity Costs				Activity Rate * Activity-Base Usage
	Activity Rate	Activity-Base Usage		LEC 40	LEC 90
Maintaining parts inventory	$                                         150.00	450 parts	750 parts	$                                67,500	$                  1,12,500
Processing purchase orders	$                                           50.00	1200 orders	800 orders	$                                60,000	$                     40,000
Quality control	$                                           20.00	800 test runs	1450 test runs	$                                16,000	$                     29,000
Machine Related	$                                           31.75	12000 hours	8000 hours	$                             3,81,000	$                  2,54,000
Total Manufacturing Overhead				$                             5,24,500	$                  4,35,500
No. of units				50000 units	25000 units
Manufacturing Overhead per unit				$                                  10.49	$                       17.42
Computation of Unit Product Costs
	LEC 40	LEC 90
Direct material per unit	$                                           30.00	$                                  50.00
Direct labor per unit	$                                             6.00	$                                    8.00
Manufacturing Overhead per unit	$                                           10.49	$                                  17.42
Unit Product Costs	$                                           46.49	$                                  75.42