Question

3. Short Round Inc manufactures two types of hats, fedoras and baseball caps. Fedoras require 2 hours of direct labor per unit to manufacture fedoras compared to 1 hour of direct labor per unit to produce baseball caps. Overhead is currently allocated to the two products on the basis of direct labor hours. Short Round estimated it would incur $510,000 in manufacturing overhead costs, and produce 10,000 units of fedoras and 40,000 units of baseball caps during the current year. Unit costs for direct materials and direct labor are as follows: Baseball Caps Fedoras $24 $6 $12 Direct materials per unit Direct labor per unit $11 a. What is the unit product cost of each product under the current overhead allocation method? b. Short Round is considering the use of activity-based costing as an alternative to its current overhead allocation method. Data relating to the company's activity cost pools for the current year are given below: Machine setups Purchase orders Machine-hours Maintenance requests Expected Activity Levels Estimated OH costs Baseball Caps Fedoras Total $204,000 800 1,600 2,400 $43,500 500 100 600 $105,000 7,000 10,500 17,500 $157,500 650 850 1,500 Using the data above, what is the revised unit product cost of each product under the activity- based costing system? c. Compare your answers to parts a and b. What overhead activities seem to contribute to the differences you observe?

Answer 1

a. Overhead rate = Estimated manufacturing overhead costs/Estimated direct labor hours = $510000/[(10000 x 2) + (40000 x 1)] = $510000/[20000 + 40000] = $510000/60000 = $8.50 per direct labor hour

	Baseball Caps	Fedoras
Direct materials	11.00	24.00
Direct labor	6.00	12.00
Manufacturing overhead	8.50	17.00
Unit product cost $	25.50	53.00

b.

				Baseball Caps		Fedoras
Activity	Estimated OH costs	Total Expected Activity	Activity Rate	Expected Activity	OH Cost	Expected Activity	OH Cost
Machine setups	204000	2400	85.00	800	68000	1600	136000
Purchase orders	43500	600	72.50	500	36250	100	7250
Machine-hours	105000	17500	6.00	7000	42000	10500	63000
Maintenance requests	157500	1500	105.00	650	68250	850	89250
Total $	510000				214500		295500
Number of units produced					40000		10000
Overhead cost per unit $					5.3625		29.55

	Baseball Caps	Fedoras
Direct materials	11.00	24.00
Direct labor	6.00	12.00
Manufacturing overhead	5.36	29.55
Unit product cost $	22.36	65.55

Kindly round off as required since no instructions have been provided with the question regarding rounding off.

c. Machine setups and machine-hours for Fedoras are comparatively much higher than for Baseball caps and contribute to the difference in the overhead cost per the current allocation method and the activity-based allocation method.