Question

Problem 2A-4 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing (LO2- Ellix Company manufactures two models of ultra-high fidelity speakers—the X200 model and the X99 model. Data regarding the two products follow: Product X200 X99 Direct Labor-Hours 0.4 DLHS per unit 0.6 DLHS per unit Annual Production 17,000 units 37,000 units Total Direct Labor-Hours 6,800 DLHS 22,200 DLHS 29,000 DLHS Additional information about the company follows: a. Model X200 requires $44 in direct materials per unit, and model X99 requires $22 b. The direct labor workers are paid $30 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 Machine setups Special processing General factory Activity Measure Number of setups Machine-hours Direct labor-hours Estimated Total Cost $ 177,600 275,400 1,450,000 $ 1,903,000 X200 X99 96 144 1,020 6,800 22,200 Total 240 1,020 29,000

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

1.
a.	Plantwide predetermined overhead rate	=	1,903,000	/	29,000	$65.62	Per DHL
b.	Computation of Unit product Cost
			X200		X99
	Direct material		$44.00		$99.00
	Direct labour		$12.00		$18.00
	Overhead		$26.25		$39.37
			(65.62*0.4)		(65.62*0.6)
	Total Unit cost		$82.25		$156.37
2. a	Computation of Activity rate for each cost pool
	Activity		Estimated Total cost	/	Estimated total activity		Rate
	Machine setup		$177,600	/	240	=	$740
	Special processing		$275,400	/	1020	=	$270
	General factory		$1,450,000	/	29000	=	$50
			$1,903,000
b.	Computation of total product cost						Calculations
			X200		X99		X200	X99
	Direct material		$748,000		$3,663,000		44*17000	99*37000
	Direct labor		$204,000		$666,000		12*17000	18*37000
	Machine setup		$71,040		$106,560		740*96	740*144
	Special processing		$275,400		$0
	General factory		$340,000		$1,110,000		50*6800	50*22200
	Total cost		$1,638,440		$5,545,560
	Number of units		17000		37000
	Unit Cost		$96.38		$149.88