Question

Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $5,696,000 in manufacturing overhead cost and produce 24,000 units of the deluxe model and 121,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows: Model Deluxe Regular Direct materials $ 152 $ 110 Direct labor $ 10 $ 12 Required: 1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. 1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. 2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity-based system would have the following four activity cost pools: Activity Cost Pool Activity Measure Estimated Overhead Cost Purchasing Purchase orders issued $ 292,500 Processing Machine-hours 3,185,000 Scrap/rework Scrap/rework orders issued 675,000 Shipping Number of shipments 1,543,500 $ 5,696,000 Expected Activity Activity Measure Deluxe Regular Total Purchase orders issued 390 780 1,170 Machine-hours 19,600 29,400 49,000 Scrap/rework orders issued 500 400 900 Number of shipments 5,880 8,820 14,700 Determine the predetermined overhead rate for each of the four activity cost pools. 3. Using the predetermined overhead rates you computed in part (2), do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model. b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).

Answer 1

Required: 1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate.
Model	Deluxe model	Regular model	Total
Units produced	24,000	121,000
Multiply: Hours per unit	1.00	0.50
Direct labor hours	24,000	60,500	84,500
Manufacturing overhead			$         5,696,000
Divided by: total direct labor hours			84,500
Predetermined overhead rate			$          67.40828
1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model.
Model	Deluxe model	Regular model
Predetermined overhead rate	$            67.40828	$          67.40828
Multiply: Hours per unit	1.00	0.50
Manufacturing overhead per unit	$                   67.41	$                 33.70
Direct materials	$                 152.00	$              110.00
Direct labor	$                   10.00	$                 12.00
Manufacturing overhead per unit	$                   67.41	$                 33.70
Unit product cost	$                 229.41	$              155.70
Determine the predetermined overhead rate for each of the four activity cost pools
Activity	Cost Pool	Divided by: Activity Measure	Cost driver rate
Purchasing Purchase orders issued	$               292,500	1,170	$               250.00
Processing Machine-hours	$           3,185,000	49,000	$                 65.00
Scrap/rework Scrap/rework orders issued	$               675,000	900	$               750.00
Shipping Number of shipments	$           1,543,500	14,700	$               105.00
3. Using the predetermined overhead rates you computed in part (2), do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.
Model	Deluxe model
Activity	Cost driver rate	Multiply by: Activity Measure	Overhead allocated
Purchasing Purchase orders issued	$                 250.00	390	$               97,500
Processing Machine-hours	$                   65.00	19,600	$         1,274,000
Scrap/rework Scrap/rework orders issued	$                 750.00	500	$            375,000
Shipping Number of shipments	$                 105.00	5,880	$            617,400
Overhead allocated to deluxe model			$         2,363,900
Model	Regular model
Activity	Cost driver rate	Multiply by: Activity Measure	Overhead allocated
Purchasing Purchase orders issued	$                 250.00	780	$            195,000
Processing Machine-hours	$                   65.00	29,400	$         1,911,000
Scrap/rework Scrap/rework orders issued	$                 750.00	400	$            300,000
Shipping Number of shipments	$                 105.00	8,820	$            926,100
Overhead allocated to regular model			$         3,332,100
Model	Deluxe model	Regular model
Overhead allocated	$     2,363,900.00	$ 3,332,100.00
Divided by: Units produced	$           24,000.00	$      121,000.00
Overhead cost per unit	$                   98.50	$                 27.54
3. Using the predetermined overhead rates you computed in part (2), do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.
Model	Deluxe model	Regular model
Direct materials	$                 152.00	$              110.00
Direct labor	$                   10.00	$                 12.00
Manufacturing overhead per unit	$                   98.50	$                 27.54
Unit product cost	$                 260.50	$              149.54