Question

1. Boxcar Electronics uses the same machinery to produce multiple products. Total overhead cost for the company is $1,800,000. 72,000 direct labor hours were used during the year. The following additional information was found in the company’s records:

Product A All Other Products Total

Units produced 3,500 659,000 662,500

Direct material cost $ 50,000 $ 4,450,000 $ 4,500,000

Direct labor cost $ 12,000 $ 488,000 $ 500,000

Machine hours 16,500 733,500 750,000

Direct labor hours 2,200 69,800 72,000

Engineering changes per year 5 295 300

Production set-ups 30 2,470 2,500

Given the technological nature of these products, the company periodically modifies the products to meet customer-specific needs. Engineering overhead costs incurred to make these product changes total $480,000 per year. Each production run also requires a unique set-up for each product. Total set-up charges of $420,000 are included in manufacturing overhead. Other major activities, their total overhead costs, and related cost drivers are purchasing $315,000, material costs; production, $585,000, direct labor hours.

Calculate the cost of Product A using the traditional method of overhead allocation.

Estimate the product’s overhead cost per unit using each of the following four possible allocation bases:

Direct material cost

Direct labor cost

Machine hours

Direct labor hours

Calculate the total cost and unit cost of Product A using activity-based costing.

Answer 1

Direct Material	$50,000
Direct Labor	$12,000
Overhead
Engineering	$8,000
($1,600 x 5))
Production set-ups	$5,040
($168 x 30)
Other -Based on material costs	$3,500
($0.07 x $50,000)
Other -Based on direct labor hours	$17,875
($8.125 x 2,200)
The total cost of product A	$96,415
Units Produced	3,500
The unit cost of product A	$27.55
Working
Activity Cost Pool	Estimated OH Cost	Activity Measures Used	Per Activity
Engineering	$480,000	300 engineering change	$1,600
Production set-ups	$420,000	2,500 setups	$168
Other -Based on material costs	$315,000	$4,500,000 Material Cost	$0.07
Other -Based on direct labor hours	$585,000	72,000 Direct labor hours	$8.125
	$1,800,000