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 @ $20.00 per hour) LEC 40 $30.00 $ 4.00 LEC 90 $ 52.00 $12.00 Management estimates that the company will incur $1,056,000 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

We will first calculate the total direct labor hours

LEC 40=0.20 DLH per unit*80,000 units

=16,000 DLH

LEC 90=0.60 DLH*40,000 units

=24,000 DLH

TOTAL DLH = 16,000+24,000

=40,000

PRE DETERMINED OVERHEAD RATE = MANUFACTURING OVERHEAD / TOTAL DIRECT LABOUR OVERHEAD

=$1,056,000/40,000

=$26.4 PER DLH

(2) unit product cost

	LEC 40	LEC 90
Direct Material	$30	$52
Direct labor	$4	$12
Manufacturing overhead	$5.28[$26.4*0.20 DLH per unit]	$15.84[$26.4*0.60 DLH per unit]
unit product cost	$39.28[$30+4+$5.28]	$79.84[$52+$12+$15,84]