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 0.40 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 $ 30.00 $ 50.00 Direct labor (0.40 hours and 0.80 hours @ $15.00 per hour) $ 6.00 $ 12.00 Management estimates that the company will incur $912,000 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. 1-a. compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor hours. 1-b. using this rate and other data from the problem, determine the unit product cost of each product. 2. management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing systemm would have all following four activity cost pools: Activity Cost Pool Activity Measure Estimated Overhead Cost Maintaining parts inventory Number of part types $ 225,000 Processing purchase orders Number of purchase orders 182,000 Quality control Number of tests run 45,000 Machine-related Machine-hours 460,000 $ 912,000 Expected Activity Activity Measure LEC 40 LEC 90 Total Number of part types 600 900 1,500 Number of purchase orders 2,000 800 2,800 Number of tests run 500 1,750 2,250 Machine-hours 1,600 8,400 10,000 Determine the activity rate for each of the four activity cost pools. 3. using the activity rates you computed in part 2 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

Answer 1

Predetermined rate = Estimated Overheads/Estimated labor hours
=912000/(60000*0.4+20000*0.8)
=$22.8 per hour
Unit product Cost
	LEC 40	LEC 90
Direct Material	30	50
Direct Labor	6	12
Overhead	9.12	18.24
Unit product Cost	45.12	80.24
Activity Rate = Estimated Overheads/Estimated Activity
Cost Pool	Overhead Amount	Total Activity	Activity Rate
Maintaining Inventory	225000	1500	150	per part type
Processing Purchase Orders	182000	2800	65	per order
Quality Control	45000	2250	20	per test
Machine Related	460000	10000	46	per MH
Cost Assigned = Activity Rate*Activity Consumed
		LEC 40		LEC 90
Cost Pool	Activity Rate	Activity	Overhead Assigned	Activity	Overhead Assigned
Maintaining Inventory	150	600	90,000	900	135,000
Processing Purchase Orders	65	2,000	130,000	800	52,000
Quality Control	20	500	10,000	1,750	35,000
Machine Related	46	1,600	73,600	8,400	386,400
		Total	303,600		608,400
		Number of units	60,000		20,000
		Overhead cost per unit	5.06		30.42
Unit product Cost
	LEC 40	LEC 90
Direct Material	30	50
Direct Labor	6	12
Overhead	5.06	30.42
Unit product Cost	41.06	92.42