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

Answer:

Estimated Manufacturing overheads = $6,088,700

Direct Labor hours for Deluxe = Direct Labor hours per unit * No.of units produced = 1 * 17,000 = 17,000 hours

Direct Labor hours for Regular = Direct Labor hours per unit * No.of units produced = 0.5 * 118,000 = 59,000 hours

Total Direct Labor hours = 17,000 + 59,000 = 76,000 hours

1-a.

Pre-determined overhead rate = Estimated Manufacturing overheads / Total Direct Labor hours

                                                        = $6,088,700 / 76,000 hours

                                                        = $80.11 per Direct Labor hour

1-b.

Overheads allocated to Deluxe = Direct Labor hours * Pre-determined overhead rate

                                                              = 17,000 hours * $80.11 per hour

                                                              = $13,61,946

Overheads allocated to Regular = Direct Labor hours * Pre-determined overhead rate

                                                              = 59,000 hours * $80.11 per hour

                                                              = $47,26,754

Overheads allocated to Deluxe per unit = Total Manufacturing overheads allocated / No. of units produced

                                                                             = $13,61,946 / 17,000

                                                                             = $80.11

Overheads allocated to Regular per unit = Total Manufacturing overheads allocated / No. of units produced

                                                                             = $47,26,754 / 118,000

                                                                             = $40.06

Unit Product Cost

3-a.

3-b.