Question

For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:

	LEC 40		LEC 90
Direct materials	$	28.00	$	44.00
Direct labor (0.20 hours and 0.60 hours @ $10.00 per hour)	$	2.00	$	6.00

Management estimates that the company will incur $856,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.

2. Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Maintaining parts inventory	Number of part types	$	262,500
Processing purchase orders	Number of purchase orders		80,000
Quality control	Number of tests run		84,000
Machine-related	Machine-hours		429,500
		$	856,000

	Expected Activity
Activity Measure	LEC 40	LEC 90	Total
Number of part types	650	1,100	1,750
Number of purchase orders	1,300	700	2,000
Number of tests run	1,200	1,600	2,800
Machine-hours	6,000	4,000	10,000

Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)

Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)

Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)

Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.) UUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUU Activity Cost Pool Maintaining inventory Processing purchase orders Quality control Activity Rate per part type per order per test per MH Machine-related

Answer 1

Solution:

37K ar Cost driver Maintaining parts inventory Processing purchase orders Quality control Machine related Computation of Activity rates Cost assigned Total activity level $262,500 1750 $80,000 2000 $84,000 2800 $429,500 10000 Activity rate $150.00 per part type $40.00 per order $30.00 per test $42.95 per MH 10 11 12 14 18 19 20 21 22 22 Sheet26 (23) Sheet237 Sheet142 (5) Sheet151 Sheet152 Sheet153 Sheet155