Question

Problem 3A-4 (Algo) Activity-Based Absorption Costing as an Alternative to Traditional Product Costing [LO3-5] Ellix Company manufactures two models of ultra-high fidelity speakers—the X200 model and the X99 model. Data regarding the two products follow: Product Direct Labor-Hours Annual Production Total Direct Labor-Hours X200 0.4 DLHs per unit 19,000 units 7,600 DLHs X99 0.6 DLHs per unit 48,000 units 28,800 DLHs 36,400 DLHs Additional information about the company follows: a. Model X200 requires $30 in direct materials per unit, and model X99 requires $25. b. The direct labor workers are paid $50 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. d. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment. e. Because of the special work required in (d) above, the company is considering the use of activity-based absorption costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Estimated Total Activity Activity Cost Pool Activity Measure Estimated Total Cost X200 X99 Total Machine setups Number of setups $ 192,000 96 144 240 Special processing Machine-hours 288,000 960 0 960 General factory Direct labor-hours 2,912,000 7,600 28,800 36,400 $ 3,392,000 Required: 1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products. a. Compute the plantwide predetermined overhead rate. b. Compute the unit product cost of each model. 2. Assume that the company decides to use activity-based absorption costing to apply overhead cost to products. a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based approach. b. Compute the unit product cost of each model.

Answer 1

Solution 1a and b:

Predetermined overhead rate = $3392000/ 36400 = $93.19

Computation of Unit Product Cost
	X200	X99
Direct Materials	$30.00	$25.00
Direct Labor ($50*Labor hours per unit)	$20.00	$30.00
Overhead Cost per unit ($93.19*Labor hours per unit)	$37.28	$55.91
Unit product cost	$87.28	$110.91

Solution 2a and b:

Computation of Activity rates for each activity
Activities	Overhead costs	Estimated activity		Activity Rate
Machine setups	$1,92,000	240	Setups	$800.00
Special Processing	$2,88,000	960	Machine hours	$300.00
General Factory	$29,12,000	36400	Direct labor hours	$80.00
Total	$33,92,000
Computation of Overhead Cost Applied to each model
		X200		X99
Activities	Activity Rate	Estimated Activity	Overhead Allocated	Estimated Activity	Overhead Allocated
Machine setups	$800.00	96	$76,800	144	$1,15,200
Special Processing	$300.00	960	$2,88,000	0	$0
General Factory	$80.00	7600	$6,08,000	28800	$23,04,000
Total cost Applied			$9,72,800		$24,19,200
No. of units			19000		48000
Overhead per unit			51.20		50.40

Computation of Unit Product Cost
	X200	X99
Direct Materials	$30.00	$25.00
Direct Labor ($50*Labor hours per unit)	$20.00	$30.00
Overhead Cost per unit (Total allocation/ Units)	$51.20	$50.40
Unit product cost	$101.20	$105.40