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 $ 51.00 $ 39.00 Direct labor per unit $ 9.00 $ 7.60 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 $ 595,000 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) $ 462,000 7,000 70,000 77,000 Batch setups (setups) 81,000 200 100 300 Safety testing (tests) 52,000 30 70 100 Total manufacturing overhead cost $ 595,000 Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Answer 1

Solution 1:

Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor hours

= $595,000 / 77000 = $7.73 per direct labor hour

Computation of Unit Product Cost - Stillicum Corporation
Particulars	Deluxe	Standard
Direct material per unit	$51.00	$39.00
Direct labor per unit	$9.00	$7.60
Manufacturing overhead per unit	$5.41	$10.82
Unit product cost	$65.41	$57.42

Solution 2:

Computation of overhead assigned to product and overhead cost per unit - Activity Based Costing
Activity	Cost	Cost Driver	Qty of cost driver	Allocation rate	Deluxe		Standard
					Allocation Qty	Allocated Overhead	Allocation Qty	Allocated Overhead
Supporting direct labor	$462,000.00	Direct labor hours	77000	$6.00	7000	$42,000.00	70000	$420,000.00
Batch setup	$81,000.00	Nos of setups	300	$270.00	200	$54,000.00	100	$27,000.00
Safety testing	$52,000.00	Nos of tests	100	$520.00	30	$15,600.00	70	$36,400.00
Total	$595,000.00					$111,600.00		$483,400.00
Nos of units						10000		50000
Overhead cost per unit						$11.16		$9.67

Computation of Unit Product Cost - Stillicum Corporation (Activity Based Costing)
Particulars	Deluxe	Standard
Direct material per unit	$51.00	$39.00
Direct labor per unit	$9.00	$7.60
Manufacturing overhead per unit	$11.16	$9.67
Unit product cost	$71.16	$56.27