Question

1. Truax manufactures and sells two products: Product V9 and Product M6. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: Expected Production 380 480 Direct Labor-Hours Per Unit 9.8 6.8 Product V9 Product M6 Total direct labor-hours Total Direct Labor- Hours 3,724 3,264 6,988 The direct labor rate is $25.60 per DLH. The direct materials cost per unit for each product is given below: Direct Materials Cost per Unit $277.60 S170.80 Product V9 Product M6 The company is considering adopting an activity- based costing system with the following activity cost pools, activity measures, and expected activity: Expected Activity Activity Cost Pools Labor-related Product testing Activity Measures DLHs Tests Estimated Overhead Cost $ 96,656 71,208 388,00 0 555,86 Product V9 3,724 720 4,300 Product M6 3,264 960 3,920 Total 6,988 1,680 Order size MHS 8,220 What is the cost of each product under traditional method of applying overhead (using a plant-wide overhead rate)? (Show work to support your answers.)( 4 Points) What is the cost of each product using activity-based costing overhead rates? (Show work to support your answers.) (6 Points)

Answer 1

Answer)

Calculation of cost of each product under traditional method (using Plant wide rate)

Particulars	Product V9	Product M6
Direct Material
Product V9 (380 units X $ 277.60 per unit)	$ 105,488.00
Product M6 (480 units X $ 170.80 per unit)		$ 81,984.00
Direct Labour:
Product V9 (3,724 direct labour hours X $ 25.60 per DLH)	$ 95,334.40
Product M6 (3,264 direct labour hours X $ 25.60 per DLH)		$ 83,558.40
Overheads:
Product V9 (3,724 direct labour hours X $ 79.5455 per DLH)	$ 296,227.44
Product M6 (3,264 direct labour hours X $ 79.5455 per DLH)		$ 259,636.51
Total Cost	$ 497,049.84	$ 425,178.91
Expected Production (number of units)	380	480
Cost per unit	$ 1,308.03	$ 885.79

Therefore total cost for product V9 is $ 1308.03 per unit and for product M6 is $ 885.79 per unit.

Working Notes:

Calculation of single plant wide overhead rate based on direct labour hours

Single plant wide rate = Total estimated overheads/ Total estimated direct labour hours

                                        = $ 555,864/ 6,988 direct labour hours

                                        = $ 79.5455 per direct labour hour.         

Therefore single plant wide overhead rate is $ 79.5455 per direct labour hour.

Allocation of Overheads

Overheads allocated to Product V9 = (Total estimated direct labour hours X overhead rate per direct labour hour)

                                                                 = 3,724 direct labour hours X $ 79.5455 per DLH

                                                                 =$ 296,227.44

Therefore overheads allocated to product V9 are $ 296,227.44.

Overheads allocated to Product M6 = (Total estimated direct labour hours X overhead rate per direct labour hour)

                                                                 = 3,264 direct labour hours X $ 79.5455 per DLH                                                                    

                                                               = $ 259,636.51

Therefore overheads allocated to product M6 are $ 259,636.51

Calculation of cost of each product under Activity Based Costing

Particulars	Product V9	Product M6
Direct Material
Product V9 (380 units X $ 277.60 per unit)	$ 105,488.00
Product M6 (480 units X $ 170.80 per unit)		$ 81,984.00
Direct Labour:
Product V9 (3,724 direct labour hours X $ 25.60 per DLH)	$ 95,334.40
Product M6 (3,264 direct labour hours X $ 25.60 per DLH)		$ 83,558.40
Overheads:
Labour-related
Product V9 (3,724 direct labour hours X $ 13.8317 per DLH)	$ 51,509.25
Product M6 (3,264 direct labour hours X $ 13.8317 per DLH)		$ 45,146.67
Product Testing
Product V9 (720 tests X $ 42.3857 per test)	$ 30,517.70
Product M6 (960 tests X $ 42.3857 per test)		$ 40,690.27
Order Size
Product V9 (4,300 machine hours X $ 47.2019 per machine hour)	$ 202,968.17
Product M6 (3,920 machine hours X $ 47.2019 per machine hour)		$ 185,031.45
Total Cost	$ 485,817.52	$ 436,410.79
Total Cost (Rounded off)	$ 485,818	$ 436,411
Expected Production (number of units)	380	480
Cost per unit	$ 1,278.47	$ 909.19

Therefore total cost for product V9 is $ 1278.47 per unit and for product M6 is $ 909.19 per unit.

Working Note:

Activity Cost Pools	Activity Measures	Total Estimated overhead cost	Total Expected Activity	Cost Per Activity
Labour-related	Direct Labour hours	$ 96,656	6,988 direct labour hours	$ 13.8317 per direct labour hour
Product testing	Number of Tests	$ 71,208	1,680 tests	$ 42.3857 per test
Order size	Number of Machine hours	$ 388,000	8,220 machine hours	$ 47.2019 per machine hour
Total		$ 555,864