Question

Private Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $78.00 per machine hour. Production information follows.

	No. 156						No. 157
Anticipated volume (units)		6,600						15,500
Direct material cost		$	43					$	68
Direct labor cost			40						28

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow.

	No. 156				No. 157				Total
Setups		63				43				106
Machine hours worked		15,300				26,500				41,800
Outgoing shipments		123				83				206

The firm's total overhead of $3,260,400 is subdivided as follows: manufacturing setups, $263,000; machine processing, $2,557,800; and product shipping, $439,600.

Required:

1. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
2. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
3. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
4. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156?

per SU per MH per OS A. Manufacturing setups Machine processing Product shipping B. Overhead costs of product: No. 156 No. 157 Cost per unit of product no. 156 D. Product no. 156

Answer 1

		No. 156	No. 157
Anticipated volume (units)		6,600	15,500
Direct material cost		43	68
Direct labor cost		40	28
A.Pool rate = Estimated Overheads/Estimated Driver
Manufacturing Setups	=263000/106	2481.13	per Setup
Machien Processing	=2557800/41800	61.19	per MH
Product Shipping	=439600/206	2133.98	per OS
B. Overhead cost of product = Rate*Driver consumed
No. 156	1,354,997.73
No. 157	1,905,343.93
Cost per unit	205.30
An increase in price since lower overheads would be allocated under traditional system