Question

Precision Manufacturing Inc. (PMI) makes two types of industrial compobent parts—the EX300 and the TX500. It annually produces 61,000 units of EX300 and 12,600 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 $367,325 $121,000 TX500 $163,550 $ 43,000 Total $530,875 $164,000 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 EX300 $207,900 91,000 159,900 80 94,689 1 62,320 $121,000 $524,800 TX500 63,000 310 1 $43,000 Total 154,000 390 2 $164,000 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

1.a)	Plantwide OH rate		=	Total Manu. OH cost / Total Direct Labor cost
			=	$ 524800 / $ 164000
			=	$      3.20	or 320%

1.b)	Computation of unit product cost
	Particulars			EX300	TX500
	Direct Materials			$ 3,67,325.00	$ 1,63,550.00
	Direct Labor			$ 1,21,000.00	$    43,000.00
	Manufacturing OH			$ 3,87,200.00	$ 1,37,600.00
	Total cost			$ 8,75,525.00	$ 3,44,150.00
	No. of units			61000	12600
	Cost per unit			$            14.35	$            27.31

2.a)	Computation of activity rate
	Cost pool
	Machining		$           1.35	($ 207900 / 154000)
	Setups		$      410.00	($ 159900 / 390)
	Product level		$ 47,340.00	($ 94680 / 2)
	General factory		$           0.38	($ 62320 / $ 164000)

2.b)	Computation of unit product cost
	Particulars			EX300	TX500
	Direct Materials			$ 3,67,325.00	$ 1,63,550.00
	Direct Labor			$ 1,21,000.00	$    43,000.00
	Manufacturing OH:
	Machining			$ 1,22,850.00	$    85,050.00
	Setups			$    32,800.00	$ 1,27,100.00
	Product level			$    47,340.00	$    47,340.00
	General factory			$    45,980.00	$    16,340.00
	Total cost			$ 7,37,295.00	$ 4,82,380.00
	No. of units			61000	12600
	Cost per unit			$            12.09	$            38.28

Is this correct?