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 2 hours of direct labor time per unit to manufacture compared to 1 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 $1,038,898 in manufacturing overhead costs and produce 14,100 units of Product W and 70,500 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product S			Product W
Direct material	$	14		$	29
Direct labor		15			14

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:

			Total Activity
Activity Cost Pool	Total Cost		Product S	Product W	Total
Machine setups required	$	481,000	1,210	2,490	3,700
Purchase orders issued		53,040	543	137	680
Machine-hours required		286,350	7,780	11,310	19,090
Maintenance requests issued		218,508	672	900	1,572
	$	1,038,898

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Answer 1

a1) Overhead rate = 1038898/98700 = 10.53 per hour

a2) Unit product cost

	Product S	Product W
Direct material	14	29
Direct labor	15	14
Overhead	10.53	10.53*2 = 21.06
Unit product cost	39.53	64.06

b) Unit product cost

	Product S	Product W
Machine setup	157300	323700
Purchase order	42354	10686
Machine hour	116700	169650
Maintenance request	93408	125100
Total overhead	409762	629136
Unit	70500	14100
Overhead cost per unit	5.81	44.62
Direct material	14	29
Direct labor	15	14
Unit product cost	34.81	87.62