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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 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 $ 20.00 $ 46.00
Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour) $ 3.00 $ 9.00

Management estimates that the company will incur $920,000 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.

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 $ 258,000
Processing purchase orders Number of purchase orders 80,000
Quality control Number of tests run 32,000
Machine-related Machine-hours 550,000
$ 920,000
Expected Activity
Activity Measure LEC 40 LEC 90 Total
Number of part types 750 1,400 2,150
Number of purchase orders 1,600 400 2,000
Number of tests run 1,400 1,800 3,200
Machine-hours 4,000 6,000 10,000

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

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.

Solutions

Expert Solution

Answer is rounded off to 2 decimal points


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