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 $6,758,325 in manufacturing overhead cost and produce 20,000 units of the deluxe model and 124,000 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   $   150      $   116     
Direct labor   $   18      $   10     

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   $   238,650
Processing   Machine-hours      4,800,000
Scrap/rework   Scrap/rework orders issued      585,675
Shipping   Number of shipments      1,134,000
       $   6,758,325

   
Expected Activity

Activity Measure   Deluxe   Regular   Total
Purchase orders issued   430   860   1,290
Machine-hours   19,200   28,800   48,000
Scrap/rework orders issued   475   380   855
Number of shipments   5,040   7,560   12,600

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