Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring 3 hours of direct labor time per unit to manufacture compared to 1 hour of direct labor time for Product S. Product W is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $958,396 in manufacturing overhead costs and produce 18,100 units of Product W and 72,400 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product S			Product W
Direct material	$	12		$	34
Direct labor		16			13

Required:

a-1. Compute the predetermined overhead rate under the current method of allocation.

a-2. Determine the unit product cost of each product for the current year.

b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

			Total Activity
Activity Cost Pool	Total Cost		Product S	Product W	Total
Machine setups required	$	411,680	1,690	1,630	3,320
Purchase orders issued		56,316	547	175	722
Machine-hours required		203,500	7,400	11,100	18,500
Maintenance requests issued		286,900	658	852	1,510
	$	958,396

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Answer 1

Part-a-1 Computation of Predetermined Overhead Rate

=Estimated Manufacturing Overhead / Expected DLH

=958396/126700=$7.56 per DLH

Total Direct Labour Hour= (18100*3)+(72400*1)=126700 DLH

Part-a-2 Computation of Unit Product Cost
	Product S	Product W
Direct Material	$12.00	$34.00
Direct Labour	$16.00	$13.00
Manufacturing Overhead	$7.56	$22.68
	(7.56*1)	(7.56*3)
Unit Product Cost	$35.56	$69.68

Part-b
Computation of Activity Rate & Assigned Overhead on Product
				Product S		Product W
Activity Cost Pool	Total Cost (a)	No. of Activity (b)	Activity Rate (c=a/b)	No. of Activity (d)	Overhead Assigned (cXd)	No. of Activity (e )	Overhead Assigned (cXe)
Machine setups required	$411,680	3,320	$124	1,690	$209,560	1,630	$202,120
Purchase orders issued	$56,316	722	$78	547	$42,666	175	$13,650
Machine-hours required	$203,500	18,500	$11	7,400	$81,400	11,100	$122,100
Maintenance requests issued	$286,900	1,510	$190	658	$125,020	852	$161,880
Total	$958,396				$458,646		$499,750
No. of Unit					72400		18100
Overhead Cost per Unit					$6.33		$27.61

Part-a-2 Computation of Unit Product Cost
	Product S	Product W
Direct Material	$12.00	$34.00
Direct Labour	$16.00	$13.00
Manufacturing Overhead	$6.33	$27.61
Unit Product Cost	$34.33	$74.61