Question

Upton Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Long and Short, about which it has provided the following data:

	Long				Short
Direct materials per unit	$	15.60			$	47.30
Direct labor per unit	$	18.20			$	51.80
Direct labor-hours per unit		0.65				1.95
Annual production		40,000				25,000

The company's estimated total manufacturing overhead for the year is $4,473,040 and the company's estimated total direct labor-hours for the year is 74,750.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

Activities and Activity Measures	Estimated Overhead Cost
Direct labor support (DLHs)		$	2,981,040
Setting up machines (setups)			456,000
Part administration (part types)			1,036,000
Total		$	4,473,040

	Expected Activity
	Long		Short		Total
DLHs	26,000		48,750		74,750
Setups	1,280		2,200		3,480
Part types	840		2,550		3,390

The unit product cost of product Long under the company's traditional costing system is closest to:

Answer 1

Answer

• Traditional allocation method = based on DLHs
• Total DLHs = 74750
• Total Estimated Overhead cost = $ 4473040
• Traditional allocation rate for overhead = $ 4473040 / 74750 = $ 59.84
• Unit Product cost for LONG
  = $ 15.60 direct material + $ 18.20 direct labor + (0.65 DLH x $ 59.84)
  = 15.60 + 18.20 + 38.90
  = $ 72.70
• Correct Answer = $ 72.70 (or $ 72.69)