Question

Looking to achieve the highest grade possible, please see below. Please indicate if this answer is correct. IF I have left a calcuation out, please include.

Thank you,

The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 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 a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are:
			Product 1	Product 2
	Direct Labour		$7	$15
	Direct material		$9	$20
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. (5 marks)
			Product 1	Product 2	Total		Allocation
Direct Labour hour / unit			1.5	3			396,000 / 49,500
units produced			22,000	5,500			8
total labour hour			33,000	16,500	49,500
overhead/unit			12	24			overhead/unit is calculated by direct LH x 8
		Product 1	Product 2
Direct material		9	20
Direct labour		7	15
overhead/unit		16	35
cost/unit		32	70
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: (5 marks)
					Expected Activity
		Activity Costs Pools		Estimated Overhead Costs	Product 1	Product 2	Total
		Machine set-ups required		$170,000	700	1,000	1,700
		Purchase orders issued		37,000	300	200	500
		Machine-hours required		91,000	4,000	9,000	13,000
		Maintenance requests issued		98,000	400	600	1,000
				$396,000
	Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.
			Total Cost	Product A	Product B
	Machine Setups		170,000	70,000	100,000
	purchase order		37,000	22,200	14,800
	machine hours		91,000	28,000	63,000
	maintenance requests		98,000	39,200	58,800
	Total		396,000	159,400	236,600
				22,000	5,500
	overhead /cost			7..25	43..02
			product 1	product 2
	Direct Labour		9	20
	direct material		7	15
	overhead / unit		7..25	43.02.
	Unit/ cost		23..25	78.020.

Answer 1

Yes , your answer is correct.

SOLUTION A		Total hours
	Calculation of total budgeted hours
	Product	units	hour per case	total hours
	Product 1	22000	1.5	33000
	product 2	5500	3	16500
				49500
				49500
	recovery rates=   total over head cost/ total budgeted hours
	= 396000/49500
		8
		Rs 8 per hour
	Particulars		Product 1	Product 2
	Direct material		9	20
	Direct labour		7	15
	overhead/unit (1.5*8)/(3*8)		12	24
	cost/unit		28	59
Solution b	calculation of cost per activity cost pools
	Expected Activity
	Activity Costs Pools		Estimated Overhead Costs	Product 1	Product 2	Total	Cost per cost pool( total cost/ total of cost pools)
	Machine set-ups required		170000	700	1,000	1,700	100
	Purchase orders issued		37,000	300	200	500	74
	Machine-hours required		91,000	4,000	9,000	13,000	7
	Maintenance requests issued		98,000	400	600	1,000	98
			396000
	Calculation of OH cost per unit		Product 1	Product2
	Machine set-ups cost		70000	100000
	Purchase orders cost		22200	14800
	Machine-hourscost		28000	63000
	Maintenance cost		39200	58800
	Total OH cost		159400	236600
	No of units		22000	5500
	Per unit OH cost		7.25	43.02
			Product 1	Product2
	materil		9	20
	labour		7	15
	overhead / unit		7.25	43.02
	Unit/ cost		23.25	78.02