Question

Q1.ABC Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin. Product W is the more complex of the two products, requiring one hour of direct labor time per unit to manufacture compared to one-half 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 SR 750,000 in manufacturing overhead costs and produce 15,000 units of Product W and 65,000 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product s	Product w
Direct material	15	25
Direct labor	10	13

Required:

a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.

The company expects to work 50,000 direct labor-hours during the current year of which 20,000 for product s and 30,000 for product w.
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:

Activity cost pools	Estimated overhead costs	Expected activity		Total
		Product s	Product w
Machine set up	250,000	900	1,600	2,500
Purchase orders	50,000	550	200	750
Machine hours	105,000	3,500	10,500	14,000
Maintenance requested	345,000	1,400	1,600	3,000
Total	750,000	6,350	13,900	20,250

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

Answer 1

Predetermined overhead rate = SR 750,000 / 50,000 hours = SR 15 per direct labor hour
Computation of activity rate
Activity cost pools	Estimated overhead costs	Expected activity	Activity rate
Machine set up	250,000.00	2,500.00	100.00	per Set up
Purchase orders	50,000.00	750.00	66.67	per Order
Machine hours	105,000.00	14,000.00	7.50	per hour
Maintenance requested	345,000.00	3,000.00	115.00	per request
Total	750,000.00
Product cost;
	Product s	Product w
Machine set up	90,000.00	160,000.00
Purchase orders	36,666.67	13,333.33
Machine hours	26,250.00	78,750.00
Maintenance requested	161,000.00	184,000.00
Total overhead cost	313,916.67	436,083.33
Number of units	20,000.00	30,000.00
Overhead cost per unit	15.70	14.54
Direct Material	15.00	25.00
Direct Labor	10.00	13.00
Total cost per unit	40.70	52.54