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 @ $10.00 per hour) LEC 40 $28.00 $ 2.00 LEC 90 $44.00 $ 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.

Answer 1

Activity rate for each activity cost pool

Maintaining inventory rate per part type = Estimated overhead cost for maintaining inventory / Total number of part types = $262,500 / 1,750 part types = $150 per part type.

Processing purchase orders rate per purchase orders = Estimated overhead cost for processing purchase orders / Total Purchase orders = $80,000 / 2,000 orders = $40 per order.

Quality control rate per test run = Estimated overhead cost for quality control / Total number of test runs = $84,000 / 2,800 test runs = $30 per test run.

Machine related rate per machine hours = Estimated overhead cost for machine related / Total machine hours = $429,500 / 10,000 hours = $42.95 per machine hour.