Question

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

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,088,700 in manufacturing overhead cost and produce 17,000 units of the deluxe model and 118,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows:

    Model
Deluxe   Regular
Direct materials   $   145      $   105     
Direct labor   $   11      $   7     

Required:
1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate.
1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model.
2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity-based system would have the following four activity cost pools:

Activity Cost Pool   Activity Measure   Estimated Overhead Cost
Purchasing   Purchase orders issued   $   233,100
Processing   Machine-hours      3,500,000
Scrap/rework   Scrap/rework orders issued      804,600
Shipping   Number of shipments      1,551,000
       $   6,088,700


   
Expected Activity
Activity Measure   Deluxe   Regular   Total
Purchase orders issued   420   840   1,260
Machine-hours   20,000   30,000   50,000
Scrap/rework orders issued   600   480   1,080
Number of shipments   5,640   8,460   14,100


Determine the predetermined overhead rate for each of the four activity cost pools.
3. Using the predetermined overhead rates you computed in part (2), do the following:
a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.
b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).

Answer 1

1.

*Predetermined overhead rate = Budgeted manufacturing overhead / Direct labor hours

Predetermined overhead rate = $6,088,700 / (17,000*1+118,000*0.5)

Predetermined overhead rate = $6,088,700 / 76,000 = $80.11 per direct labor hour

	Deluxe	Regular
Direct material	$145	$105
Direct labor	11	7
Applied overhead	80.11	40.06 (80.11*0.5)
Unit product cost	$236.11	$152.06

2.

Activity cost pool	Overhead cost	Activity measure	Activity rate
Purchasing	$233,100	1,260	$185	per purchase order issued
Processing	3,500,000	50,000	70	per machine hour
Scrap/rework	804,600	1,080	745	per scrap/rework orders issued
Shipping	1,551,000	14,100	110	per number of shipments
Total	$6,088,700

3.

	Deluxe	Regular
Purchasing	$77,700 (420*$185)	$155,400 (840*$185)
Processing	1,400,000 (20,000*70)	2,100,000 (30,000*70)
Scarp/rework	447,000 (600*745)	357,600 (480*745)
Shipping	620,400 (5,640*110)	930,600 (8,460*110)
Total manufacturing overhead cost	$2,545,100	$3,543,600
Manufacturing overhead cost per unit	$149.71 (2,545,100/17,000)	$30.03 (3,543,600/118,000)

	Deluxe	Regular
Direct material	$145	$105
Direct labor	11	7
Applied overhead	149.71	30.03
Unit product cost	$305.71	$142.03