Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $495,000 in overhead costs would be incurred and the company would produce and sell 2,500 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.00 hours. Direct materials and labor costs per unit are given below:

	Flexible			Rigid
Direct materials cost per unit	$	120		$	75
Direct labor cost per unit	$	25		$	10

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

				Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost			Flexible			Rigid			Total
Purchase orders (number of orders)	$	21,500			155			275		430
Rework requests (number of requests)		11,500			70			160		230
Product testing (number of tests)		160,000			600			1,000		1,600
Machine related (machine-hours)		302,000			1,000			2,020		3,020
	$	495,000

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

    

Answer 1

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

Estimated Overhead cost/Direct Labor Hours

Direct Labor Hours = (2500 units * 2 hours) + (10000 units * 1 hours) = 15000 hours

$495000/15000 hours = $33 per DLH

1-b. Compute the unit product cost for one unit of each model

	Flexible	Rigid
DM	$120	$75
DL	$25	$10
Overhead	($33 * 2 DLH) =$66	(33 * 1 DLH) =$33
Cost per unit	$211	$118

2 Compute the activity rate for each of the activity cost pools.     

Activity Cost Pool and Activity Measure	Estimated OH Cost (A)	Expected Activity (B)	Activity Rate (A/B)
Purchase orders (number of orders)	$21500	430 orders	$50 per order
Rework requests (number of requests)	$11500	230 requests	$50 per request
Product testing (number of tests)	$160000	1600 tests	$100 per test
Machine related (machine-hours)	$302000	3020 MH	$100 per MH
	$495000

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

	Flexible	Rigid
Purchase orders (number of orders)	(155 * $50) =$7750	(275 * $50) =$13750
Rework requests (number of requests)	(70 * $50) =$3500	(160 * $50) =$8000
Product testing (number of tests)	(600 * $100) =$60000	(1000 * $100) =$100000
Machine related (machine-hours)	(1000 * $100) =$100000	(2020 * $100) =$202000
Total Overhead	$171250	$323750

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

	Flexible	Rigid
DM	$120	$75
DL	$25	$10
Overhead	($171250/2500 units) =$68.50	($323750/10000 units) =$32.375
Cost per unit	$213.50	$117.375