Question

Problem 4-17 Contrast Activity-Based Costing and Conventional Product Costing (LO4-2, L04-3, L04-4) [The following information applies to the questions displayed below.) Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Model N 800 XL Model N 500 Direct Labor- Total Direct Hours per Unit Annual Production Labor-Hours 3,000 units 9.000 12,000 units 12,000 21,000 Additional information about the company follows: a. Model N 800 XL requires $75 in direct materials per unit, and Model N 500 requires $25. b. The direct labor wage rate is $18 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products, d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Activity Cost Pool Machine setups Special processing General factory Activity Measure Number of setups Machine-hours Direct labor-hours Estimated Overhead Cost $ 360,000 165,000 1,260,000 $ 1,785,000 Activity Measure Number of setups Machine-hours Direct Labor-hours Model N800 XL 100 16,500 9,000 Expected Activity Model N50D 200 Total 300 16,500 21,000 12,000

Answer 1

Req 2A1
Calculation of activity rate for each activity cost pool
Activity rate	Estimated overhead costs/Expected activity
Machine setups	$1,200	per set-ups	360000/300
Special processing	$10	per machine hours	165000/16500
General factory	$60	per direct labor hours	1260000/21000
Calculation of overhead costs assigned to each model is shown below
	Model N 800 XL	Model N 500
Machine setups (1,200*100; 1,200*200)	$120,000	$240,000
Special processing (16,500*10; 0)	$165,000	$0
General factory (9,000*60; 12,000*60)	$540,000	$720,000
Total overhead costs assigned	$825,000	$960,000
No of units produced	3000	12000
Overhead costs per unit	$275	$80
Calculation of unit product costs
	Model N 800 XL	Model N 500
Direct material	$75	$25
Direct labor (3*18; 1*18)	$54	$18
Overhead costs	$275	$80
Unit product costs	$404	$123
Req 1A
Predetermined overhead rate	Estimated overhead costs/Estimated direct labor hours
Predetermined overhead rate	1,785,000/21,000
Predetermined overhead rate	$85	per direct labor hours
Req 1B
Calculation of unit product costs
	Model N 800 XL	Model N 500
Direct material	$75	$25
Direct labor (3*18; 1*18)	$54	$18
Overhead costs per unit	$255	$85
	(85*9,000)/3000	(85*12000)/12000
Unit product costs	$384	$128