Question

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

	Xactive			Pathbreaker
Direct materials per unit	$	64.80		$	51.00
Direct labor cost per unit	$	18.20		$	13.00
Direct labor-hours per unit		1.4	DLHs		1.0	DLHs
Estimated annual production and sales		25,000	units		75,000	units

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$2,200,000
Estimated total direct labor-hours	110,000	DLHs

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

2. The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

	Estimated Overhead Cost			Expected Activity
Activity Cost Pools and Activity Measures				Xactive			Pathbreaker			Total
Supporting direct labor (direct labor-hours)	$	797,500			35,000			75,000		110,000
Batch setups (setups)		680,000			250			150		400
Product sustaining (number of products)		650,000			1			1		2
General factory (machine-hours)		72,500			2,500			7,500		10,000
Total manufacturing overhead cost	$	2,200,000

Determine the activity rate for each of the four activity cost pools.

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

Answer 1

1-a.
Predetermined overhead rate = Estimated total manufacturing overhead / Estimated total direct labor hours = 2200000 / 110000 =	20.00	per DLH

1-b.
	Xactive	Pathbreaker
Direct materials per unit	64.80	51.00
Direct labor cost per unit	18.20	13.00
Manufacturing overhead per unit [ Predetermined overhead rate * Direct labor hours per unit ]	28.00	20.00
Unit product cost	111.00	84.00

2.
Activity cost pools	Activity rate [ Estimated overhead cost / Expected total activity ]
Supporting direct labor [ 797500/110000 ]	7.25	per DLH
Batch setup [ 680000/400 ]	1700	per setup
Product sustaining [ 650000/2 ]	325000	per product
General factory [ 72500/10000 ]	7.25	per MHR

3.
	Xactive	Pathbreaker
Overhead alloction : [ Activity rate * Expected activity ]
Supporting direct labor	253750	543750
Batch setup	425000	255000
Product sustaining	325000	325000
General factory	18125	54375
Total overhead allocated	1021875	1178125
(/) Estimated annual production	25000	75000
Overhead cost per unit	40.88	15.71

	Xactive	Pathbreaker
Direct materials per unit	64.80	51.00
Direct labor cost per unit	18.20	13.00
Overhead cost per unit	40.88	15.71
Unit product cost	123.88	79.71