Question

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 56,000 units of EX300 and 12,100 units of TX500. The company's conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: Direct materials Direct labor EX300 $362,325 $116,000 TX500 $158,550 $ 40,500 Total $520,875 $156,500 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below: Activity Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-level (number of products) General factory (direct labor dollars) Total manufacturing overhead cost Manufacturing Overhead $219,750 113,400 54,970 50,080 $438,200 EX300 86,000 55 1 $116,000 TX500 60,500 260 1 $40,500 Total 146,500 315 $156,500 Required: 1-a. Compute the plantwide overhead rate that would be used in the company's conventional cost system. 1-b. Using the plantwide rate, compute the unit product cost for each product. 2-a. Compute the activity rate for each activity cost pool. 2-b. Using the activity rates, compute the unit product cost for each product.

Answer 1

Calaculation of Requirements:

1a. Calaculation of Plant wide overhead rate:

Predetermined overhead rate

2.8

per DL$

Overhead rate

= Total manufacturing overhead ÷ Total direct labor dollars

= $438200 ÷ $156500

= 2.8

2b. Calaculation of unit product cost for each product

.	EX300	TX500
Unit product cost	$14.34	$25.82

Calaculation:

.	EX300	TX500
Direct materials	$362325	$158550
Direct labor	$116000	$40500
Manufacturing Overhad applied (direct labor $ × overhead rate)	$324800 ($116000×2.8)	$113400 ($40500×2.8)
Total product cost	$803125	$312450
Units produced	56000 units	12100 units
Unit product cost	$14.34 p.unit	$25.82 p.unit

3a. Calaculation of Activity Rate:

Activity cost pool	Manufacturing overhead cost (a)	Activity (b)	Activity rate (a/b)
Machining	$219750	146500 machine hrs	$1.5 per DLH
Setups	$113400	315 setups	$360 per setup
Product level	$54970	2 products	$27485 per product
General factory	$50080	$156500 direct labor$	0.32 per DL$

4b. Calaculation of unit product cost using activity rate:

.	EX300	TX500
Unit product cost	$12.35	$35.03

Calaculation:

Activity cost pool	EX300	TX500
Machining	$129000 (86000×$1.5)	$90750 (60500×$1.5)
Machine Setups	$19800 (55×$360)	$93600 (260×$360)
Product level	$27485 (1×$27485)	$27485 (1×$27485)
General factory	$37120 ($116000×0.32)	$12960 (40500×0.32)
Total Overhead Cost	$213405	$224795

Now,

.	EX300	TX500
Direct materials	$362325	$158550
Direct labor	$116000	$40500
Overhead cost	$213405	$224795
Total product cost	$691730	$423845
Units produced	56000 units	12100 units
Unit product cost	$12.35 p.unit	$35.03 p.unit

______×______

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