Question

For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.80 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.60 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:

	LEC 40		LEC 90
Direct materials	$	30.00	$	50.00
Direct labor (0.60 hours and 0.80 hours @ $10.00 per hour)	$	6.00	$	8.00

Management estimates that the company will incur $960,000 in manufacturing overhead costs during the current year and 50,000 units of the LEC 40 and 25,000 units of the LEC 90 will be produced and sold.

2. Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Maintaining parts inventory	Number of part types	$	180,000
Processing purchase orders	Number of purchase orders		100,000
Quality control	Number of tests run		45,000
Machine-related	Machine-hours		635,000
		$	960,000

	Expected Activity
Activity Measure	LEC 40	LEC 90	Total
Number of part types	450	750	1,200
Number of purchase orders	1,200	800	2,000
Number of tests run	800	1,450	2,250
Machine-hours	12,000	8,000	20,000

Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)

Answer 1

Calculation of Activity Rate
Activity	Activity Cost(Col 1)	Cost Driver(Col 2)	Activity Rate(Col 1 / Col.2)
Maintaining parts inventory	$                                      1,80,000	1200 parts	$                           150.00	Per parts
Processing purchase orders	$                                      1,00,000	2000 purchase orders	$                             50.00	Per purchase orders
Quality control	$                                         45,000	2250 test runs	$                             20.00	Per test runs
Machine Related	$                                      6,35,000	20000 machine hours	$                             31.75	Per machine hours