Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product S. Product W is the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to a half-hour of direct labour time for Product S. Product W is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct labour hours. The company estimated it would incur $500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labour are:

Product S

Product W

Direct materials

$10

$24

Direct labour

$8

$12

Required:

a) Compute the predetermined overhead rate under the current method of allocation, and determine the unit product cost of each product for the current year.

b) The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

Expected Activity

Activity Cost Pool

Estimated Overhead Cost

Product S

Product W

Total

Machine setups required

$200,00

800

1,200

2,000

Purchase orders issued

43,500

500

100

600

Machine hours required

104,000

3,000

10,000

13,000

Maintenance requests issued

152,500

860

1,140

2,000

Total

$500,000

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

a) The company expects to work 40,000 direct labour hours during the current year, computed as follows:

Product S: 60,000 units x 0.5 hr

30,000 hours

Product W: 10,000 units x 1.0 hrs

10,000 hours

Total direct labour hours

40,000 hours

Using these hours as a base, the predetermined overhead using direct labour hours would be:

Predetermined overhead rate = $500,000/40,000 DLHs = $12.50/DLH

Using this overhead rate, the unit product cost of each product would be:

Product S

Product W

Direct Materials

$10.00

$24.00

Direct Labour

8.00

12.00

Manufacturing Overhead:

Product B-half hour

6.25

Product H-one hour

12.50

Total

$24.25

$48.50

b) The overhead rates are computed as follows:

Activity Cost Pool

Estimated Overhead Cost

Total Expected Activity

Rate

Machine setups

$200,000

2,000

$100.00/setup

Purchase orders

43,500

600

72.50/order

Machine hours

104,000

13,000

8.00/hour

Maintenance requests

152,500

2,000

76.25/request

Total

$500,000

The overhead cost attributable to each product is:

Product S

Product W

Activity

Amount

Activity

Amount

Machine setups, $100.00/setup

800

$80,000

1,200

$120,000

Purchase orders, $72.50/order

500

36,250

100

7,250

Machine hours, $8.00/hour

3,000

24,000

10,000

80,000

Maintenance request, at $76.25/require

860

65,575

1,140

86,925

$205,825

$294,175

Overhead cost per unit:

Product S: $205,825/60,000 units = $3.4304/unit.

Product W: $294,175/10,000 units = $29.4175/unit.

Using activity-based costing, the unit product cost of each product would be:

Product S

Product W

Direct Materials

$10.0000

$24.0000

Direct Labour

8.0000

12.0000

Manufacturing Overhead

3.4304

29.4175

Total Unit Product Cost

$21.4304

$65.4175

Answer 1

A) Calculation of Overhead rate by taking estimated direct labour hour as base Expected Direct Labour Hours Product W Products (10000 X 1) (60000 X 0.5) 10000 Hours 30000 Hours Total Dirct Labour Hours 40000 Hours Overhead cost 500000 Predetermined Overhead Rate 12.5 (500000/40000) Using the Overhead Rate, Product Cost will be Products Product W 10 8 24 12 Direct Material Direct Labour Overhead Products Product W 12.5 (12.5 X 1) (12.5 X 0.5) 6.25 Total Unit Product Cost 30.5 42.25 b) The Overhead Rate for each activities is as follows-: Machine Setup Purchase Order Machine Hours Maintenance Request Estimated Expected Overhead Overhead Activity Rates Cost 200000 2000 100 43500 600 72.5 104000 13000 8 152500 2000 76.25 Overhead cost per unit using activity based costing Machine Setup Purchase Order Machine Hours Maintenance Request Products Product W Activity Amount Activity Amount 800 80000 1200 120000 500 36250 100 7250 3000 24000 10000 80000 8640 658800 1140 86925 799050 294175 Units 60000 10000 Overhead Cost Per Unit 13.3175 29.4175 Using the activity based costing , Product Cost will be Products Product W 10 24 12 8 Direct Material Direct Labour Overhead Products Product W 13.175 29.4175 Total Unit Product Cost 31.175 65.4175