Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below:

	Flexible		Rigid
Direct materials cost per unit	$	110.00	$	80.00
Direct labor cost per unit	$	30.00	$	15.00

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

				Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost			Flexible			Rigid			Total
Purchase orders (number of orders)	$	20,000			100			300		400
Rework requests (number of requests)		10,000			60			140		200
Product testing (number of tests)		210,000			900			1,200		2,100
Machine related (machine-hours)		360,000			1,500			2,500		4,000
	$	600,000

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

Answer 1

Answer;

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

Predetermined overhead rate

= Total estimated overheads/Total estimated direct labor hours

= $600,000/(2 hours * 1,000 units) + (1 hours * 10,000 units)

= $600,000/12,000 DL hours

= $50 per direct labor hour

________________________________________________________

1-b. Compute the unit product cost for one unit of each model.

	Flexible	Rigid
Direct materials per unit	110	80
Add: Direct labor cost per unit	30	15
Add: Manufacturing overhead per unit Flex(50*2), Rgid (50*1)	100	50
Unit product cost	240	145

_____________________________________________________

2

Activity rate for each of the activity cost pools:

Activity Cost Pool and Activity Measure	Estimated Overhead Cost	Expected Activity total	Rate
	A	B	C=A/B
Purchase orders (number of orders)	20000	400	50
Rework requests (number of requests)	10000	200	50
Product testing (number of tests)	210000	2100	100
Machine related (machine-hours)	360000	4000	90
	600000

So rate for each of the activity cost pools is

Activity Cost Pool and Activity Measure	Rate
Purchase orders (number of orders)	50
Rework requests (number of requests)	50
Product testing (number of tests)	100
Machine related (machine-hours)	90

___________________________________________________

3

Total amount of overheads assigned to each model:

overheads assigned Flexible ,Model

Activity Cost Pool and Activity Measure	Rate	Expected Activity for Flexible
0	A	B	C=A*B
Purchase orders (number of orders)	50	100	5000
Rework requests (number of requests)	50	60	3000
Product testing (number of tests)	100	900	90000
Machine related (machine-hours)	90	1500	135000
Total			233000

overheads assigned Rigid ,Model

	Rate	Expected Activity for Rigid
Activity Cost Pool and Activity Measure	A	B	C=A*B
0	50	300	15000
Purchase orders (number of orders)	50	140	7000
Rework requests (number of requests)	100	1200	120000
Product testing (number of tests)	90	2500	225000
Total			367000

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

	Flexible	Rigid
Direct materials per unit	110	80
Add: Direct labor cost per unit	30	15
Add: Manufacturing overhead per unit
(233,000/1000)	233
(367000/10,000)		36.7
Unit product cost	373	131.7