Question

Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company’s two product lines appear below:

	Deluxe			Standard
Direct materials per unit	$	72.00		$	53.00
Direct labor per unit	$	19.00		$	15.20
Direct labor-hours per unit		1.0	DLHs		0.8	DLHs
Estimated annual production		10,000	units		50,000	units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$	325,000
Estimated total direct labor-hours		50,000	DLHs

Required:

1. Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools:

			Expected Activity
Activity Cost Pools and Activity Measures	Estimated Overhead Cost		Deluxe	Standard	Total
Supporting direct labor (direct labor-hours)	$	200,000	10,000	40,000	50,000
Batch setups (setups)		75,000	200	100	300
Safety testing (tests)		50,000	30	70	100
Total manufacturing overhead cost	$	325,000

Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Answer 1

Solution 1:

Overhead rate = Budgeted manufacturing overhead / budgeted direct labor hours = $325,000 / 50000 = $6.50 per direct labor hours

Computation of unit product cost - Stillicum Corporation (Traditional costing)
Particulars	Deluxe	Standard
Direct material	$72.00	$53.00
Direct labor	$19.00	$15.20
Manufacturing overhead	$6.50	$5.20
Unit Product Cost	$97.50	$73.40

Solution 2:

Determination of overhead rate and allocated overheads to product lines and overheaed cost per unit- Activity based costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Deluxe		Standard
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor	$200,000.00	Direct labor hours	50000	$4.00	10000	$40,000.00	40000	$160,000.00
Batch setup	$75,000.00	Setups	300	$250.00	200	$50,000.00	100	$25,000.00
Safety testing	$50,000.00	Tests	100	$500.00	30	$15,000.00	70	$35,000.00
Total	$325,000.00					$105,000.00		$220,000.00
Nos of units						10000		50000
Overhead cost per unit						$10.50		$4.40

Computation of unit product cost - Stillicum Corporation (Activity Based Costing)
Particulars	Deluxe	Standard
Direct material	$72.00	$53.00
Direct labor	$19.00	$15.20
Manufacturing overhead	$10.50	$4.40
Unit Product Cost	$101.50	$72.60