Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring 3 hours of direct labor time per unit to manufacture compared to 2 hours 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 $912,811 in manufacturing overhead costs and produce 19,000 units of Product W and 76,000 units of Product S during the current year. Unit cost for materials and direct labor are: Product S $ 15 10 Product W Direct material Direct labor $ 25 12 Required: a-1. Compute the predetermined overhead rate under the current method of allocation. a-2. Determine the unit product cost of each product for the current year. b. 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: Total Activity Product W 1,620 Activity cost Pool Machine setups required Purchase orders iSsued Machine-hours required Maintenance requests issued Total Cost $ 405,000 60, 6৪0 Product S 1,620 553 7,460 Total 3,240 187 740 273,450 173,681 $ 912,811 10,770 18,230 1,537 673 864 Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Answer 1

a-1) Predetermine overhead rate = Estimated manufacturing overhead cost / total direct labor hours $912.811/[(19,000 * 3 hours) + (76,000 * 2 hours)] $912.811 / 209,000 direct labor hours $4.37 per DLH a-2) Products Product W Unit product cost $29.37 $41.37 Workings: Product S Product W Direct materials $15.00 $25.00 Direct labour $10.00 $12.00 Manufacturing overhead $4.37 $4.37 Total unit product cost $29.37 $41.37 Product S Product W Unit product cost $30.73 $62.11 Overhead Rate Workings: The overhead rates are computed as follows: Total Estimated Activity Cost Pools Overhead cost Expected Activity Machine setups $405,000 3,240 Purchase orders $60.680 740 Machine-hours $273.450 18.230 Maintenance requests $173,681 1,537 $912,811 $125 per setup $82 per order $15 per hour $113 per request The overhead cost attributable to each product is: Product S Activity Amount Machine setups 1,620 $202,500 Purchase orders 553 $45,346 Machine-hours 7,460 $111.900 Maintenance requests 673 $76,049 Total $435.795 Product W Activity Amount 1.620 $202.500 187 $15,334 10.770 $161.550 864 $97.632 $477,016 Overhead cost per unit: Products Product W $435,795 / 76,000 = $477,016 / 19,000 = $5.73 per unit $25.11 per unit Using activity-based costing, the unit product cost of each product would be: Product S Product W Direct materials $15.00 $25.00 Direct labour $10.00 $12.00 Manufacturing overhead $5.73 $25.11 Total unit product cost $30.73 $62.11