Question

Required information [The following information applies to the questions displayed below.] 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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 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: Direct materials Direct labor (0.20 hours and 0.60 hours @ $20.00 per hour) LEC 40 $ 30.00 $ 4.00 LEC 90 $ 52.00 $12.00 Management estimates that the company will incur $1,056,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.

Answer 1

Solution:

1.Calculation of Activity rate for Activity Cost Pool – Maintaining Inventory :

The formula for calculating the Activity Rate is

= Estimated overhead cost of the Activity / Expected Activity measure

As per the information given in the question we have

Estimated overhead cost = Cost of the Activity of Maintaining Inventory = $ 540,000

Expected Activity measure = Number of Part Types = 3,000

Thus the Activity Rate is

= Cost of the Activity of Maintaining Inventory / Number of Part Types

= $ 540,000 / 3,000

= $ 180.00

Thus the Activity Rate is $ 180.00 per part type

2.Calculation of Activity rate for Activity Cost Pool – Processing purchase orders :

The formula for calculating the Activity Rate is

= Estimated overhead cost of the Activity / Expected Activity measure

As per the information given in the question we have

Estimated overhead cost = Cost of the Activity of Processing purchase orders = $ 100,000

Expected Activity measure = Number of Purchase orders = 2,000

Thus the Activity Rate is

= Cost of the Activity of Processing purchase orders / Number of Purchase orders

= $ 100,000 / 2,000

= $ 50.00

Thus the Activity Rate is $ 50.00 per Purchase Order

3.Calculation of Activity rate for Activity Cost Pool – Quality Control :

The formula for calculating the Activity Rate is

= Estimated overhead cost of the Activity / Expected Activity measure

As per the information given in the question we have

Estimated overhead cost = Cost of the Activity of Quality Control = $ 81,000

Expected Activity measure = Number of test runs = 4,050

Thus the Activity Rate is

= Cost of the Activity of Quality Control / Number of test runs

= $ 81,000 / 4,050

= $ 20.00

Thus the Activity Rate is $ 50.00 per test run

4.Calculation of Activity rate for Activity Cost Pool – Machine Related :

The formula for calculating the Activity Rate is

= Estimated overhead cost of the Activity / Expected Activity measure

As per the information given in the question we have

Estimated overhead cost = Cost of the Machine Related Activity = $ 335,000

Expected Activity measure = Number of Machine Hours = 10,000

Thus the Activity Rate is

= Cost of Machine Related Activity / Number of Machine hours

= $ 335,000 / 10,000

= $ 33.50

Thus the Activity Rate is $ 33.50 per Machine hour

Thus we have

Activity Cost Pool	Activity Rate
Maintaining inventory	$ 180.00	Per part type
Processing purchase orders	$ 50.00	Per order
Quality control	$ 20.00	Per test
Machine-related	$ 33.50	Per MH