Question

Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the company's products follows. 5 points Standard: Estimated production volume, 3.000 units Direct-material cost, $25 per unit Direct labor per unit, 3 hours at $12 per hour eBook Enhanced: Estimated production volume, 4,000 units Direct-material cost, $40 per unit Direct labor per unit. 4 hours at $12 per hour Print Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Standard Enhanced Total Orders Machine Processed Hours Worked 300 18,000 200 22,000 40,000 Inspection Hours 2,000 8,000 10,000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed-machinery that was expected to produce significant operating efficiencies. Required: 1. Assuming use of direct-labor hours to apply overhead to production, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained. 2. Assuming use of activity-based costing, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained. 3. Ontario's selling prices are based heavily on cost. Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Reg За Req 3b Assuming use of direct-labor hours to apply overhead to production, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing, volume is attained. Standard Enhanced Manufacturing cost per unit < Reg 1 Req 2 >

Answer 1

(1) Manufacturing cost per unit :-

	Standard	Enhanced
Manufacturing cost per unit	$157	$216

Applied Overhead Rate/unit = Budgeted Overhead ÷ Budgeted Direct Labor Hours

Budgeted Overhead:  $800,000

Budgeted Direct Labor Hours:  (3,000 x 3/hour) + (4,000 x 4/hour) = 25,000

Applied Overhead Rate/unit = 800,000 ÷ 25,000 = $32/direct labor hour

                                                  Standard                 Enhanced

Direct Materials                      $  25                            $ 40

Direct Labor                          36 (3x12)                      48 (4x12)

Overhead                              96 (3x32)                     128 (4x32)

Unit Mfg Cost                         $157                               $216

(2) Manufacturing cost per unit :-

	Standard	Enhanced
Manufacturing cost per unit	$181	$198

Activity	Cost	Cost Driver	Application Rate
Order processing	$150,000	500 Orders Proc	$300/Order Proc
Machine processing	560,000	40,000 MH	14/MH
Product inspection	90,000	10,000 Insp. Hr	9/Insp Hr

	Standard	Enhanced
Order processing	$90,000 (300 x $300)	$60,000 (200 x $300)
Machine processing	252,000 (18,000 x $14)	308,000 (22,000 x $14)
Product inspection	18,000 (2,000 x $9)	72,000 (8,000 x $9)
Total	$360,000	$440,000
# of units	÷ 3,000	÷ 4,000
OH cost per unit	$120	$110

                                                    Standard                  Enhanced

Direct Materials                           $25                            $40

Direct Labor                             36 (3 x 12)                  48 (4x12)

Mfg Overhead                            120                             110

Total Cost/Unit under ABC $181                           $198

(3a)     

Standard	$24	Undercosted
Enhanced	$18	Overcosted

                                                                  Standard                Enhanced

Cost/unit using direct labor hours $157 $216

Cost/unit using ABC 181                          198

(undercosted)/overcosted $( 24)                       $ 18