Question

i) Origin Company manufactures two products, Product A and Product B. Product B is a fairly new product and is the more complex of the two products, requiring 3 hours of direct labour time per unit to manufacture compared to the 2 hours of direct labour time required for Product A. The company estimated it would incur $870,000 in manufacturing overhead costs and produce 15,000 units of Product B and 50,000 units of Product A during the current year. Unit costs for materials and labour are: Product A Product B $16 $21 Direct material $24 $14 Direct labour The company is considering the use of Activity Based Costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below: Expected Activity Estimated Overhead Activity Cost Pool Machine setups required Purchase orders issued Machine-hours required Maintenance requests issued Product A Product B Costs Total $190,000 75,000 345,000 260,000 870,000 100 20 80 300 200 8,000 500 15,000 1,300 7,000 550 750 Required: a) Assume the company is currently using a plantwide rate to allocate manufacturing overhead with direct labour hours as the cost driver. Compute the predetermined overhead rate and determine the unit product cost of each product for the current year. (3 marks)

Answer 1

a)

Production of product A = 50,000 Units

Direct labor hours needed to produce one unit of product A = 2 hours

Total Direct labor hours needed to produce product A = 50,000 x 2

= 100,000

Production of product B = 15,000 Units

Direct labor hours needed to produce one unit of product B = 3 hours

Total Direct labor hours needed to produce product B = 15,000 X 3

= 45,000

Estimated direct labor hours needed = Total Direct labor hours needed to produce product A + Total Direct labor hours needed to produce product B

= 100,000 + 45,000

= 145,000

Predetermined overhead rate = Estimated overheads/Estimated direct labor hours

= 870,000/145,000

= $6 per direct labor hour

	Product A	Product B
Direct material	24	16
Direct labor	14	21
Manufacturing overhead	2 x 6 = 12	3 x 6 = 18
Unit product cost	$50	$55

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