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 $506,000 in overhead costs would be incurred and the company would produce and sell 1,500 units of the flexible model and 8,500 units of the regular model. The flexible model requires 2.2 hours of direct labor time per unit, and the regular model requires 1.10 hours. Direct materials and labor costs per unit are given below:

    Flexible   Rigid
Direct materials cost per unit   $   115      $   60     
Direct labor cost per unit   $   35      $   10     

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)   $   21,000         110         415      525
Rework requests (number of requests)      11,000         65         210      275
Product testing (number of tests)      250,000         950         1,050      2,000
Machine related (machine-hours)      224,000         1,000         2,200      3,200
    $   506,000                          

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

1.a.
Direct Labor hours = 3300 + 9350 = 12650 hours
Flexible = 1500 x 2.2 = 3300 hours
Rigid = 8500 x 1.1 = 9350 hours

Overhead rate = $506000 / 12650 = $40 per Direct Labor hour

1.b.

	Flexible	Rigid
Direct Material	$              115	$                  60
Direct Labor	$                35	$                  10
Overhead	$                88	$                  44
Unit Product Cost	$              238	$                114

2.

Activity	Total Overhead	Cost Driver	Total Number	Activity Rate
a	b	c	d	e = b/d
Purchase Orders	$         21,000	Orders	525	$            40.00	Per Order
Reword Requests	$         11,000	Requests	275	$            40.00	Per Request
Product Testing	$     2,50,000	Tests	2000	$          125.00	Per Test
Machine related	$     2,24,000	Machine Hours	3200	$            70.00	Per Machine Hour
	$     5,06,000

3.a.

Overhead assigned
	Flexible	Rigid
Purchase Orders	$           4,400	$           16,600
Reword Requests	$           2,600	$             8,400
Product Testing	$     1,18,750	$       1,31,250
Machine related	$         70,000	$       1,54,000
Total Overhead assigned	$     1,95,750	$       3,10,250
Units	1500	8500
Overhead per unit	$        130.50	$             36.50

3.b.

	Flexible	Rigid
Direct Material	$        115.00	$             60.00
Direct Labor	$           35.00	$             10.00
Overhead	$        130.50	$             36.50
Unit Product Cost	$        280.50	$          106.50