Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit Direct labor cost per unit Flexible $ 110.00 $ 30.00 Rigid $ 80.00 $ 15.00 Required: 1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. 1-b. Compute the unit product cost for one unit of each model. 2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows: Expected Activity Activity Cost Pool and Activity Measure Purchase orders (number of orders) Rework requests (number of requests) Product testing (number of tests) Machine related machine-hours) Estimated Overhead Cost $ 20,000 10,000 210,000 360,000 $600,000 Flexible 100 60 900 1,500 Rigid 300 140 1,200 2,500 Total 400 200 2,100 4,000 Compute the activity rate for each of the activity cost pools. 3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year. 3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

Answer 1

Solution 1a:

Total direct labor hours = (1000*2) + (10000*1) = 12,000

Predetermined overhead rate = $600000/ 12000 = $50 per DLH

Solution 1b:

Computation of Unit Product Cost
	Flexible	Rigid
Direct Materials	$110.00	$80.00
Direct Labor	$30.00	$15.00
Overhead Cost per unit ($50*Labor hours per unit)	$100.00	$50.00
Unit product cost	$240.00	$145.00

Solution 2:

Computation of Activity rates
Activity cost pool	Overhead costs	Estimated activity	Activity Rate
Purchase orders	$20,000	400	$50.00	per order
Rework requests	$10,000	200	$50.00	per request
Product testing	$2,10,000	2100	$100.00	per test
Machine Related	$3,60,000	4000	$90.00	per MH

Solution 3a and 3b:

Computation of Overhead allocated and Overhead per unit
		Flexible		Rigid
Activity cost pool	Activity Rate	Estimated Activity	Overhead Allocated	Estimated Activity	Overhead Allocated
Purcahse orders	$50.00	100	$5,000	300	$15,000
Rework requests	$50.00	60	$3,000	140	$7,000
Product testing	$100.00	900	$90,000	1200	$1,20,000
Machine Related	$90.00	1500	$1,35,000	2500	$2,25,000
Total Overhead allocated			$2,33,000		$3,67,000
No. of units			1000		10000
Overhead per unit			233.00		36.70

Computation of Unit Product Cost
	Flexible	Rigid
Direct Materials	$110.00	$80.00
Direct Labor	$30.00	$15.00
Overhead Cost per unit	$233.00	$36.70
Unit product cost	$373.00	$131.70