Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring 3 hours of direct labor time per unit to manufacture compared to 2 hour of direct labor time for Product S. Product W is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $1,018.066 in manufacturing overhead costs and produce 10,800 units of Product W and 54,000 units of Product S during the current year. Unit cost for materials and direct labor are: Product S $ 12 Direct material Direct labor Product W $ 33 15 Required: a-1. Compute the predetermined overhead rate under the current method of allocation. a-2. Determine the unit product cost of each product for the current year. b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Activity Cost Pool Machine setups required Purchase orders issued Machine-hours required Maintenance requests issued Total Cost $ 440, 860 53, 430 203,610 320,166 $1,018, 066 Product S 1,560 569 7,310 749 Total Activity Product W 1,730 116 11,200 945 Total 3,290 685 18,510 1,694 Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Answer 1

	Product S	Product W	Total
Estimated production	54000	10800
(*) Estimated direct labor hours per unit	2	3
Estimated direct labor hours	108000	32400	140400

a-1.
Predetermined overhead rate = Estimated manufacturing overhead cost / Estimated total direct labor hours = 1018066 / 140400	7.25	per DLH

a-2.
	Product S	Product W
Direct material	12	33
Direct labor	9	15
Manufacturing overhead per unit [ Direct labor hours per unit * Predetermined overhead rate ]	14.50	21.75
Unit product cost	35.50	69.75

b.
Activity cost pool	Activity rate [ Estimated total cost / Estimated total activity ]
Machine setup required ( 440860 / 3290 )	134
Purchase orders issued ( 53430 / 685 )	78
Machine-hours required ( 203610 / 18510 )	11
Maintenance requests issued ( 320166 / 1694 )	189

Activity cost pool	Overhead allocated [ Activity rate * Estimated activity ]
	Product S	Product W
Machine setup required	209040	231820
Purchase orders issued	44382	9048
Machine-hours required	80410	123200
Maintenance requests issued	141561	178605
Total	475393	542673
(/) Estimated units to be produced	54000	10800
Manufacturing overhead per unit	8.80	50.25

	Product S	Product W
Direct material	12	33
Direct labor	9	15
Manufacturing overhead per unit	8.80	50.25
Unit product cost	29.80	98.25