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 0.60 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 $25.00 $ 4.00 LEC 90 $44.00 $12.00 Management estimates that the company will incur $1,024,000 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. References Section Break Problem 3-16A Contrasting ABC and Conventional Product Costs [LO3-2, LO3-3, LO3-4] Problem 3-16A Part 1 Required: 1-a. Compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor-hours. (Round your answer to 2 decimal places.)

Answer 1

Thomson Company Requirement 1a. LEC 40: 80,000 units x 0.20 DLH per unit LEC 90: 40,000 units x 0.60 DLH per unit Total direct labor-hours 16000 24000 40000 Pre OH rate = 1,024 000/ 40 000 = $25.6 per DLH Requirement 1b. LEC 40 25 LEC 90 44 12 Direct materials Direct labor Manufacturing overhead: $25.60 per DLH x 0.20 DLHS $25.60 per DLH x 0.60 DLHS Unit product cost 5.12 15.36 71.36 34.12

Activity Cost Pool Maintaining inventory Processing purchase orders Quality control Machine-related Estimated Overhead Cost 392000 100000 115500 416500 1024000 Expected Activity 2800 part types 2000 orders 3850 tests 10000 MHS Activity Rate 140.00 per part type 50.00 per order 30.00 per test 41.65 per MH LEC 40 Activity Cost Pool Expected Activity Maintaining inventory 1000 Processing purchase orders 1400 Quality control 1900 Machine-related 4000 Total manufacturing overhead cost Units produced Manufacturing overhead per unit LEC 90 Amount Expected Activity Amount 140000 1800 252000 70000 600 30000 57000 1950 58500 166600 6000 249900 433600 590400 80000 40000 5.42 14.76 LEC 40 25 4 Direct materials Direct labor Manufacturing overhead Unit product cost LEC 90 44 12 14.76 70.76 5.42 34.42