Question

Northwest Industrial Products Corporation two products 1 and product L Product is expected to sell 50,000 units and product L 100,000 units next year . A unit of either product requires 0.2 direct labor .The company's total manufacturing overhead for the year is expected to be $2925000

Required : The company currently applies manufacturing overhead to products using direct labour hours the allocation If this method is followed how overhead cost will applied to each product? Compute both the overhead cost per unit and the total amount of overhead cost that will be applied to product(In other words, how much overhead cost will be applied to of perduct ? Product L? How much overhead cost will be applied in total to all the units of product H? Product L?)

2. Management is considering activity based costing system and would like to know what impact this change might have on Page product costs. For the purpose of discussion , it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products , with $1,462,500 assigned to product H and \$1,462,500 assigned to product L.

If this suggestion is followed, how much overhead cost per unit will be applied to each product?

3. Explain the impact on unit product costs of the switch in costing systems

Answer 1

Question 1

Total Direct Labour Hours for Product H = Total Units of Product H * Direct Labour Hours per Unit

Direct Labour Hours per Unit = 0.2 Hours

Total Units of Product H = 50,000

Total Direct Labour Hours for Product H = 50,000 * 0.2

Total Direct Labour Hours for Product H = 10,000 Hours

Total Direct Labour Hours for Product L = Total Units of Product H * Direct Labour Hours per Unit

Direct Labour Hours per Unit = 0.2 Hours

Total Units of Product L = 100,000

Total Direct Labour Hours for Product L = 100,000 * 0.2

Total Direct Labour Hours for Product L = 20,000 Hours

Total Direct Labour Hours = 20,000 + 10,000 = 30,000 Hours

Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Direct Labour Hours

Total Direct Labour Hours = 30,000 Hours

Total Estimated Manufacturing Overhead = $ 29,25,000

Plantwide Overhead Rate = 29,25,000 / 30,000

Plantwide Overhead Rate = $ 97.5 Per Direct Labour Hour

Particulars	Product H	Product L
Direct Labour Hours	10,000	20,000
* Plantwide Overhead Rate	97.5	97.5
Total Overhead Applied	975,000	1,950,000

Particulars	Product H	Product L
Total Overhead Applied	975,000	1,950,000
÷ Number of Units	50,000	100,000
Overhead Cost per Unit	19.5	19.5

Question 2

Using Activity Based Costing

Particulars	Product H	Product L
Total Overhead as per Product Level	14,62,500	14,62,500
÷ Number of Units	50,000	50,000
Overhead Cost per Unit	29.25	14.63

Question 3

Particulars	Product H	Product L
Overhead Cost per Unit as per Plantwide Overhead Rate	19.5	19.5
- Overhead Cost per Unit as per Activity Based Costing	29.25	14.63
Decrease / (Increase) in Overhead Cost per Unit	(9.75)	4.87

If there is a change in the costing system being followed the unit product cost of Product H Increases by $ 9.75 per Unit whereas the unit product cost of Product L decreases by $ 4.87 per Unit. The change should be appreciated because it results in better allocation of Overhead Cost and more accurate pricing of Products Selling Price.