Question

Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company’s two product lines appear below:

	Deluxe			Standard
Direct materials per unit	$	50.00		$	38.00
Direct labor per unit	$	8.00		$	6.80
Direct labor-hours per unit		0.70	DLHs		1.40	DLHs
Estimated annual production		10,000	units		50,000	units

The company has a traditional 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	$	514,000
Estimated total direct labor-hours		77,000	DLHs

Required:

1. Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools:  

			Expected Activity
Activity Cost Pools (and Activity Measures)	Estimated Overhead Cost		Deluxe	Standard	Total
Supporting direct labor (direct labor-hours)	$	385,000	7,000	70,000	77,000
Batch setups (setups)		78,000	200	100	300
Safety testing (tests)		51,000	30	70	100
Total manufacturing overhead cost	$	514,000

Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

a. Pre-determined Rate = Estimated total manufacturing overhead / Estimated total direct labor-hours

= 514,000 / 77,000

= $ 6.67 per DL

	Deluxe	Standard
Direct Material	$ 50.00	$    38.00
Direct Labour Cost	$    8.00	$      6.80
Overhead Cost	$    4.67	$      9.34
Unit Product Cost	$ 62.67	$    54.14

b.

Activity	Cost	Activity Total	Activity Rate
Supporting direct labor	$ 385,000	77,000	$                                    5.00
Batch setups (setups)	$    78,000	300	$                               260.00
Safety testing (tests)	$    51,000	100	$                               510.00
Total	$ 514,000

	Deluxe	Standard
Supporting direct labor	$ 35,000.00	$                                350,000.00
Batch setups (setups)	$ 52,000.00	$                                   26,000.00
Safety testing (tests)	$ 15,300.00	$                                   35,700.00
Estimated Units	$ 10,000.00	$                                   50,000.00
Allocated Manufacturing cost	$          10.23	$                                             8.23

	Deluxe	Standard
Direct Material	$ 50.00	$    38.00
Direct Labour Cost	$    8.00	$      6.80
Overhead Cost	$ 10.23	$      8.23
Allocated Manufacturing cost	$ 68.23	$    53.03