Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring 2 hours of direct labor time per unit to manufacture compared to 1 hour of direct labor time for Product S. Product W is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $1,120,981 in manufacturing overhead costs and produce 14,600 units of Product W and 73,000 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product S			Product W
Direct material	$	18		$	29
Direct labor		7			21

Required:

a-1. Compute the predetermined overhead rate under the current method of allocation.

a-2. Determine the unit product cost of each product for the current year.

b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

			Total Activity
Activity Cost Pool	Total Cost		Product S	Product W	Total
Machine setups required	$	606,060	910	2,420	3,330
Purchase orders issued		55,309	585	194	779
Machine-hours required		206,580	7,880	10,900	18,780
Maintenance requests issued		253,032	678	944	1,622
	$	1,120,981

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current

Answer 1

Part a.1 and a.2
		Product S	Product W	Total
	No. of units produced	73000	14600
	Labor hours per unit	1	2
	Total Labor hours	73000	29200	102,200 hours
	Predtermined Overhead Rate =$1,120,981 / 102,200 hours =$10.968503 per hour
	Calculation of Product Cost
		Product S	Product W
	Direct material cost per unit	$                          18.00	$                                       29.00
	Direct labor cost per unit	$                            7.00	$                                       21.00
	Overhead Cost per unit(Labor hours per unit*$10.968503)	$                          10.97	$                                       21.94
	Product Cost per unit	$                          35.97	$                                       71.94
Part b
	Activities	Costs	Cost drivers	Cost driver total	Overhead rate(Costs/Cost driver total)
	Machine Setup Costs	$6,06,060	No. of setups	3,330	$182.00	per setup
	Purchase costs	$55,309	No. of orders	779	$71.00	per order
	Machine costs	$2,06,580	No. of machine hrs	18,780	$11.00	per machine hrs
	Maintainance costs	$2,53,032	No. of requests issued	1,622	$156.00	per request
		Product S	Product W
		Activity Based usage	ABC Rate	Activity Based usage*ABC rate	Activity Based usage	ABC Rate	Activity Based usage*ABC rate
	Machine Setup Costs	910	$                                          182	$                                  1,65,620	2420	$                   182.000	$                                   4,40,440
	Purchase costs	585	$                                            71	$                                     41,535	194	$                     71.000	$                                      13,774
	Machine costs	10900	$                                            11	$                                  1,19,900	10900	$                     11.000	$                                   1,19,900
	Maintainance costs	944	$                                          156	$                                  1,47,264	944	$                   156.000	$                                   1,47,264
	Total Overhead cost allocated			$                                  4,74,319			$                                   7,21,378
	No. of units produced			73000			14600
	Overhead cost per unit			$6.50			$49.41
	Calculation of Product Cost
		Product S	Product W
	Direct material cost per unit	$                          18.00	$                                       29.00
	Direct labor cost per unit	$                            7.00	$                                       21.00
	Overhead Cost per unit	$                            6.50	$                                       49.41
	Product Cost per unit	$                          31.50	$                                       99.41