Question

Multiple Versus Single Overhead Rates, Activity Drivers

Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year:

Activity	Expected Cost	Activity Driver	Activity Capacity
Setting up equipment	$473,860	Number of setups	580
Ordering costs	315,000	Number of orders	17,500
Machine costs	799,900	Machine hours	42,100
Receiving	401,700	Receiving hours	10,300

Deoro produces two models of dishwashers with the following expected prime costs and activity demands:

	Model A	Model B
Direct materials	$589,000	$847,000
Direct labor	$488,000	$458,000
Units completed	16,900	8,600
Direct labor hours	5,400	1,900
Number of setups	380	200
Number of orders	5,800	11,700
Machine hours	24,700	17,400
Receiving hours	2,600	7,700

The company's normal activity is 7,300 direct labor hours.

Required:

1. Determine the unit cost for each model using direct labor hours to apply overhead. Round intermediate calculations and final answers to nearest cent.

	Unit Cost
Model A	$
Model B	$

2. Determine the unit cost for each model using the four activity drivers. Round your answers to nearest cent.

	Unit Cost
Model A	$
Model B	$

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours

= ($473,860 + $315,000 + $799,900 + $401,700) / 7300 = $272.67 per labor hour

Computation of unit cost of each product - Traditional costing - Deoro Company
Particulars	Model A	Model B
Direct materials	$589,000.00	$847,000.00
Direct labor	$488,000.00	$458,000.00
Manufacturing overhead (5400:1900)	$1,472,395.00	$518,065.00
Total Production costs	$2,549,395.00	$1,823,065.00
Nos of units produced	16900	8600
Unit Product Cost	$150.85	$211.98

Solution 2:

Computation of Activity rate and Allocation of overhead - Activity based costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Model A		Model B
					Usage	Allocated Costs	Usage	Allocated Costs
Setting up Equipment	$473,860.00	Nos of setups	580	$817.00	380	$310,460	200	$163,400
Ordering costs	$315,000.00	Nos of orders	17500	$18.00	5800	$104,400	11700	$210,600
Machine costs	$799,900.00	Machine hours	42100	$19.00	24700	$469,300	17400	$330,600
Receiving	$401,700.00	Receiving hours	10300	$39.00	2600	$101,400	7700	$300,300
Total	$1,990,460.00					$985,560		$1,004,900

Computation of unit cost of each product - Activity Based Costing - Deoro Company
Particulars	Model A	Model B
Direct materials	$589,000.00	$847,000.00
Direct labor	$488,000.00	$458,000.00
Manufacturing overhead	$985,560.00	$1,004,900.00
Total Prodcution costs	$2,062,560.00	$2,309,900.00
Nos of units produced	16900	8600
Unit Product Cost	$122.04	$268.59