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	$	28.00	$	48.00
Direct labor (0.60 hours and 0.80 hours @ $10.00 per hour)	$	6.00	$	8.00

Management estimates that the company will incur $988,000 in manufacturing overhead costs during the current year and 60,000 units of the LEC 40 and 20,000 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	$	161,000
Processing purchase orders	Number of purchase orders		80,000
Quality control	Number of tests run		66,000
Machine-related	Machine-hours		681,000
		$	988,000

	Expected Activity
Activity Measure	LEC 40	LEC 90	Total
Number of part types	450	700	1,150
Number of purchase orders	1,600	400	2,000
Number of tests run	700	1,500	2,200
Machine-hours	1,600	10,400	12,000

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

	Activity Cost Pool Activity Rate Maintaining inventory per part type Processing purchase orders per order Quality control per test Machine-related per MH

Management estimates that the company will incur $988,000 in manufacturing overhead costs during the current year and 60,000 units of the LEC 40 and 20,000 units of the LEC 90 will be produced and sold.

3. Using the activity rates you computed in part (2), do the following:

a. Determine the per unit amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system.

b. Compute the unit product cost of each product.

Using the activity rates you computed in part (2), determine the per unit amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system.  (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Manufacturing overhead per unit of LEC 40 Manufacturing overhead per unit of LEC 90

Using the activity rates you computed in part (2), compute the unit product cost of each product. (Do not round intermediate calculations. Round your final answers to 2 decimal places)

	Unit product cost for LEC 40 Unit product cost for LEC 90

Answer 1