Question

4) A manufacturer manufactures two types of engineering diagnostic equipment used in construction. The two products are based on different technologies, x-ray and ultrasound, but are manufactured in the same factory. The manufacturer has computed the manufacturing cost of the x-ray and ultrasound products by adding together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The factory has three overhead departments that support the single production line that makes both products. Budgeted overhead spending for the departments is as follows: Department Material Handling $5,000 Engineering Design $6,000 Setup $3,000 Total $14,000 Budgeted manufacturing activities and costs for the period are as follows: Activity Product X-Ray 50 Ultrasound Units produced and sold Direct materials used Direct labor hours used Direct labor cost 100 $5,000 $8,000 300 $12,000 100 $4,000 Number of parts used Number of engineering changes Number of product setups 400 600 1 The budgeted cost to manufacture one ultrasound machine using the activity-based costing method is? 14,000 : tsal cverhead LIGcoyl A. $225 B. $264 C. $293 D. $305

Answer 1

Solution:

Computation of activity rate and allocation of overhead to Ultrasound product
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Ultrasound
					Usage	Allocated Costs
Engineering design	$6,000.00	Nos of engineering changes	3	$2,000.00	1	$2,000
Material handling	$5,000.00	Nos of parts used	1000	$5.00	600	$3,000
Setup	$3,000.00	Nos of product setup	15	$200.00	7	$1,400
Total	$14,000.00					$6,400
Nos of units						100
Overhead cost per unit						$64.00

Computation of unit cost of each product - Activity Based costing
Particulars	Ultrasound machine
Direct material	$80.00
Direct labor	$120.00
Manufacturing overhead	$64.00
Unit Product Cost	$264.00

Hence option B is correct.