Question

Required information [The following information applies to the questions displayed below.] 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: Direct materials Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour) LEC 40 $30.00 $ 3.00 LEC 90 $40.00 $ 9.00 Management estimates that the company will incur $1,008,000 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.

Answer 1

Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver (A) (B) Expected use of cost driver (A)/(B) Activity based overhead rate Activity cost pool Estimated Overhead Maintaining Inventory Processing Purchase Order Quality Control Machine Related 324,000 140,000 75,000 469,000 1,008,000 2700 Parts 2000 Purchase Order 3750 Test Run 10000 MH $ $ $ 120.00 Per Part type 70.00 Per Order 20.00 Per Test 46.90 Per MH To calculate Activity rate divide estimated overhead of particular activity by total expected activity.