Question

Problem 4-15 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $672,000 in overhead costs would be incurred and the company would produce and sell 2,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 3.0 hours of direct labor time per unit, and the regular model requires 1.50 hours. Direct materials and labor costs per unit are given below:

	Flexible			Rigid
Direct materials cost per unit	$	135		$	80
Direct labor cost per unit	$	30		$	15

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

				Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost			Flexible			Rigid			Total
Purchase orders (number of orders)	$	25,000			150			475		625
Rework requests (number of requests)		15,000			85			290		375
Product testing (number of tests)		235,000			700			1,180		1,880
Machine related (machine-hours)		397,000			1,400			2,570		3,970
	$	672,000

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

	Predetermined overhead rate    per DLH

Compute the unit product cost for one unit of each model.

	Unit Product Cost Flexible Rigid

Compute the activity rate for each of the activity cost pools.

	Activity Cost Pool Activity Rate Purchase orders    per order Rework requests per request Product testing per test Machine-related per MH

Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year

	Total Amount of Overhead Flexible Rigid

Using activity-based costing, compute the unit product cost for one unit of each model. (Do not round intermediate calculations and round your answers to 2 decimal places.)

	Unit Product Cost Flexible Rigid

Answer 1

Requirement 1(a) : Total Overhead Cost (A) Total budgeted labor hours (2000 x 3)+ (10,000 x 1.5) (B) $ 672,000.00 21000 Hours Predetermined overhead rate $32 per direct labor hour (A/B) Requirement 1(b) Flexible Rigid $ $ $ $ Direct Material $ 135.00 80.00 Direct Labor 30.00 15.00 Overhead 96.00 48.00 Cost/ Unit 261.00 143.00 Requirement 2 Activity Cost Pool Purchase Orders Estimated Overhead (A) Total Activity(B) $25,000 Activity Rate(A/B) 625 $40 per order 375 $40 per request Activity Measure Number of orders Rework requests Product testing Number of requests $15,000 Number of tests $235,000 $397,000 1,880 $125 per test 3,970 $100 per machine hour Machine related Machine hours Requirement 3(a) Expected Activity(ii Overhead Assigned (i x ii) Overhead Assigned(i x ii) Activity Cost Pool Activity Rate(i) Expected Activity(i) Flexible Flexible Rigid Rigid 6,000.00 $ 3,400.00$ 87,500.00 140,000.00 $ $ 475 $ Purchase Orders 40.00 150 19,000.00 11,600.00 147,500.00 257,000.00 435,100.00 Rework requests Product testing $ 290$ 40.00 85 1,180 $ 125.00 700 $ 2,570 $ Machine related 100.00 1,400 Total 236,900.00 Requirement 3(b) Flexible Rigid $135.00 $30.00 $118.45 $283.45 $80.00 $15.00 $43.51 Direct Material Direct Labor Overhead (236900/2000), (435100/10000) Cost per Unit $138.51