Question

1.Truax manufactures and sells two products: Product V9 and Product M6. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:

	Expected Production	Direct Labor-Hours Per Unit	Total Direct Labor-Hours
Product V9	380	9.8	3,724
Product M6	480	6.8	3,264
Total direct labor-hours			6,988

The direct labor rate is $25.60 per DLH. The direct materials cost per unit for each product is given below:

	Direct Materials Cost per Unit
Product V9	$277.60
Product M6	$170.80

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

		Estimated		Expected Activity
Activity Cost Pools	Activity Measures	Overhead Cost		Product V9		Product M6		Total
Labor-related	DLHs	$	96,656	3,724		3,264		6,988
Product testing	Tests		71,208	720		960		1,680
Order size	MHs		388,000	4,300		3,920		8,220
		$	555,864

What is the cost of each product under traditional method of applying overhead (using a plant-wide overhead rate)? (Show work to support your answers.)

What is the cost of each product using activity-based costing overhead rates? (Show work to support your answers.)

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated DLH = $555,864 / 6988 = $79.55 per labor hour

Computation of unit product cost - Truax (Traditional costing)
Particulars	Product V9	Product M6
Direct material	$277.60	$170.80
Direct labor	$250.88	$174.08
Manufacturing overhead	$779.59	$540.94
Unit Product Cost	$1,308.07	$885.82

Solution 2:

Determination of overhead rate and allocated overheads to product lines and overheaed cost per unit- Activity based costing
Activity	Estimated Overhead Cost	Usage of Activity Base	Activity Rate	Product V9		Product M6
				Usage	Allocated Costs	Usage	Allocated Costs
Labor related	$96,656.00	6988	$13.83	3724	$51,509	3264	$45,147
Product testing	$71,208.00	1680	$42.39	720	$30,518	960	$40,690
Order size	$388,000.00	8220	$47.20	4300	$202,968	3920	$185,032
Total	$555,864.00				$284,995		$270,869
Nos of units					380		480
Overhead cost per unit					$749.99		$564.31

Computation of unit product cost - Truax (Activity Based costing)
Particulars	Deluxe	Standard
Direct material	$277.60	$170.80
Direct labor	$250.88	$174.08
Manufacturing overhead	$749.99	$564.31
Unit Product Cost	$1,278.47	$909.19