Question

EMD Corporation manufactures two products, Product S and Product W. Product W is the more complex of the two products, requiring one hour of direct labor time per unit to manufacture compared to one-half hour of direct labor time for Product S. Product W is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labor are: Direct material Direct labor Products S 10 Product W $ 24 12 Required: a Compute the predetermined overhead rate under the current method of allocating overhead b. Determine the total cost of a finished unit under the current method of allocating overhead c. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Activity Cost Pool Machine setups required Purchase orders issued Machine-hours required Maintenance requests issued Total Activity Total Cost Product S Product W Total $ 200,000 800 1.200 2.000 43,500 100 600 104,000 3,000 10,000 13,000 152.500 860 1,140 2,000 S 500,000 500 d. Using the data above and an activity-based costing approach, determine the application rate for each cost pool. e. Determine the total cost of a finished unit under an activity-based costing approach.

Answer 1

		Product S	Product W
i.	Estimated production units	60000	10000
ii.	Time required per unit	0.5	1	Hour
	Total Hours required(i*ii)	30000	10000	Hours
a.	Total overhead estimated	$500,000
	total Hours required	40000
	Predetermined overhead rate =	Total estimated overhead/Total Hours required
	Predetermined overhead rate =	500,000/40,000
	Predetermined overhead rate =	$12.50	Per Hour
b.		Product S	Product W
	Direct Material cost	$600,000	$240,000
		(60,000*10)	(10,000*24)
	Direct Labor Cost	$240,000	$80,000
		(8*30,000)	(12*10,000)
	Overhead Cost	$375,000	$125,000
		(12.5*30,000)	(12.50*10,000)
	Total Cost of finished goods	$1,215,000	$445,000
d.	Activity	Total Costs	Total Activity	Application rate
	Machine Setups	$200,000	2000	$100.00	(200,000/2000)
	Purchase order issued	$43,500	600	$72.50	(43,500/600)
	Machine Hours required	$104,000	13000	$8.00	(104,000/13000)
	Maintenance requests issued	$152,500	2000	$76.25	(152,500/2000)
		$500,000
		Product S	Product W
e.	Direct Material Cost	$600,000	$240,000
	Direct labor cost	$240,000	$80,000
	Overhead cost(refer Note-1)	$205,825	$294,175
	Total Cost	$1,045,825	$614,175
Note-1	Overhead Cost allocation under ABC	Product S	Product W
	Machine Setups	$80,000	$120,000
		(800*100)	(1200*100)
	Purchase order issued	$36,250	$7,250
		(500*72.5)	(100*72.5)
	Machine Hours required	$24,000	$80,000
		(3000*8)	(10000*8)
	Maintenance requests issued	$65,575	$86,925
		(860*76.25)	(1140*76.25)
	Total overhead	$205,825	$294,175

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