Question

Exercise 4-4 Contrast ABC and Conventional Product Costs (L04-4) Pacifica Industrial Products Corporation makes two products, Product H and Product L. Product His expected to sell 38,000 units next year and Product Lis expected to sell 7,600 units. A unit of either product requires 0.2 direct labor-hours. The company's total manufacturing overhead for the year is expected to be $775,200. Required: 1-a. The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product? 1-b. Compute the total amount of overhead cost that would be applied to each product 2. Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $387,600 assigned to Product Hand $387,600 assigned to Product L. If this suggestion is followed, how much overhead cost per unit would be assigned to each product? Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Reg 2 The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product? (Round your answers to 2 decimal places.)

Answer 1

Question 1 A and 1 B

Plantwide Overhead Rate based on Direct Labour Hours = Total Estimated Manufacturing Overhead Costs / Total Estimated Direct Labour Hours

Total Estimated Manufacturing Overhead = $ 775,200

Total Estimated Direct Labour Hours = 9,120 Hours

Plantwide Overhead Rate based on Direct Labour Hour = 775,200 / 9,120

Plantwide Overhead Rate based on Direct Labour Hour = $ 85 per Direct Labour Hour

Note

Total Direct Labour Hours = 7,600 + 1,520 = 9,120 Hours

Direct Labour Hours for Product H = 38,000 * 0.2 Labour Hour per Unit = 7,600 Hours

Direct Labour Hour for Product L = 7,600 * 0.2 Labour Hour per Unit = 1,520 Hours

Total Overhead Cost for Product H = 7,600 Direct Labour Hours * $ 85 per Direct Labour Hour

Total Overhead Cost for Product H = $ 646,000

Overhead Cost per Unit of Product H = Total Overhead Cost / 38,000 Units

Overhead Cost per Unit of Product H = 646,000 / 38,000 = $ 17 per Unit

Total Overhead Cost for Product L = 1,520 DirectL Hours * $ 85 per Direct Labour Hour

Total Overhead Cost for Product L = $ 129,200

Overhead Cost per Unit of Product L = Total Overhead Cost / 7,600 Units

Overhead Cost per Unit of Product L = 129,200 / 7,600 = $ 17 per Unit

Question 2

As per Activity Based Costing

Overhead Cost per Unit of Product H using Activity Based Costing = Total Overhead Costs for Product H / Total Units of Product H

Total Overhead Costs for Product H = $ 387,600

Total Units of Product H = 38,000 Units

Overhead Cost per Unit of Product H = 387,600 / 38,000

Overhead Cost per Unit of Product H = $ 10.20

Overhead Cost per Unit of Product L using Activity Based Costing = Total Overhead Costs for Product L / Total Units of Product L

Total Overhead Costs for Product L = $ 387,600

Total Units of Product L = 7,600 Units

Overhead Cost per Unit of Product L = 387,600 / 7,600

Overhead Cost per Unit of Product L = $ 51