Question

QUESTION 1 (25 marks) Nilam Sdn. Bhd. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. The anticipated overhead and direct labor time for the upcoming period is RM800,000 and RM25,000 hours respectively. The information about the company's products follows: Estimated production volume Direct material cost Direct labor per unit Standard 3,000 units RM 25 per unit 3 hours at RM12 per hour Enhanced 4,000 units RM 40 per unit 4 hours at RM12 per hour Nilam's overhead cost of RM 800,000 can be identified with three major activities as follows: Activities Order Processing Machine Processing Product Inspection Overhead Cost RM150,000 RM560,000 RM90,000 Cost Pool No. of order processed Machine hours worked Inspection hours Data relevant to these activities follow: Standard Enhanced Total Order processed 300 200 500 Machine hours worked 18,000 22.000 40,000 Inspection Hours 2,000 8,000 10,000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook massive plant renovation during which new, highly automated machinery was installed- machinery that was expected to produce significant operating efficiencies. Required: a) Compute the manufacturing costs per unit for Standard and Enhanced products using direct-labor hours to apply overhead to production. (11 marks) (CLO3:PLO3:03)

Answer 1

Total manufacturing overhead cost Total direct labor hours estimated Plantwide overhead rate per direct labor hour RM 800,000 25,000 RM 32 ($800000 / 25000 hours) Direct labor hours Plantwide overhead rate per direct labor hour Overhad costs allocated to each product Add: Direct materials Add: Direct labor cost Total manufacturing costs recorded Number of units produced Unit product cost Standard 9,000 RM 32 RM 288,000 RM 75,000 RM 108,000 RM 471,000 3,000 RM 157 Enhanced 16,000 --> (a) [3000 x 3 hrs; 4000 x 4 hrs] RM 32 --> (b) [As calculated above] RM 512,000 --> (a) x (b) RM 160,000 (3000 x RM 25; 4000 x RM 40] RM 192,000 (9000 hrs x RM 12; 16000 hrs x RM 12] RM 864,000 --> (p) 4,000 --> (9) RM 216 --> (p)/(q) b) Activity Cost Pool Order processing Machine processing Product inspection Cost Driver order processed machine hours used inspection hours Activity Cost RM 150,000 RM 560,000 RM 90,000 Volume Activity Rate 500 RM 300 (RM 150000 / 500] 40,000 RM 14 (RM 560000 / 40000] 10,000 RM 9 (RM 90000 / 10000]

Activity Activity Activity costs assigned to Standard: Activity Rate Usage Cost Order processing order processed 300 RM 300 RM 90,000 (300 x RM 300] Machine processing machine hours used 18,000 RM 14 RM 252,000 (18000 x RM 14] Product inspection inspection hours 2,000 RM9 RM 18,000 [2000 x RM 9] Activity costs assigned to Standard: RM 360,000 Add: Direct materials RM 75,000 (3000 units x RM 25] Add: Direct labor cost RM 108,000 (9000 hrs x RM 12] Total manufacturing costs recorded RM 543,000 Number of units produced 3,000 --> (9) Unit product cost RM 181 --> (p)/(a) Activity 200 Activity Activity costs assigned to Enhanced: Activity Rate Usage Cost Order processing order processed RM 300 RM 60,000 (200 x RM 300] Machine processing machine hours used 22,000 RM 14 RM 308,000 [22000 x RM 14] Product inspection inspection hours 8,000 RM9 RM 72,000 [8000 x RM 9] Activity costs assigned to Enhanced: RM 440,000 Add: Direct materials RM 160,000 (4000 units x RM 40] Add: Direct labor cost RM 192,000 (16000 hrs x RM 12] Total manufacturing costs recorded RM 792,000 --> (p) Number of units produced 4,000 --> (9) Unit product cost RM 198 --> (p)/ (9)

c) Unit product cost using direct labor hours as basis - Standard RM 157 [Ref: Paart-(a)] Unit product cost using activity-based-costing as basis - Standard RM 181 [Ref: Paart-(b)] Therefore, Standard product is under-priced if direct labor hours is used as basis. Unit product cost using direct labor hours as basis - Enhanced RM 216 [Ref: Paart-(a)] Unit product cost using activity-based-costing as basis - Enhanced RM 198 [Ref: Paart-(b)] Therefore, Enhanced product is over-priced if direct labor hours is used as basis.