Question

In: Accounting

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.


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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 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 40LEC 90
Direct materials$30.00$48.00
Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour)$3.00$9.00

Management estimates that the company will incur $816,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 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 PoolActivity MeasureEstimated Overhead Cost
Maintaining parts inventoryNumber of part types$150,000
Processing purchase ordersNumber of purchase orders
140,000
Quality controlNumber of tests run
51,000
Machine-relatedMachine-hours
475,000


$816,000


Expected Activity
Activity MeasureLEC 40LEC 90Total
Number of part types5509501,500
Number of purchase orders1,3007002,000
Number of tests run1,0001,5502,550
Machine-hours4,0006,00010,000

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

Solutions

Expert Solution

Maintaining parts inventory
Total overheads (a) $150,000
Total number of part types (b) 1,500
Activity rate for maintaining parts inventory cost pool (a/b) $100.00
Processing purchase orders
Total overheads (a) $140,000
Total number of purchase orders (b) 2,000
Activity rate for Processing purchase orders cost pool (a/b) $70.00
Quality Control
Total overheads (a) $51,000
Total number of test runs (b) 2,550
Activity rate for quality control cost pool (a/b) $20.00
Machine-related
Total overheads (a) $475,000
Total number of machine hours (b) 10,000
Activity rate for machine related cost pool (a/b) $47.50

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Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated...
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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit...
For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago,...
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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor...
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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 0.40 hours of direct labor...
For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago,...
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...
For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago,...
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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor...
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