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 $5,374,500 in manufacturing overhead cost and produce 12,000 units of the deluxe model and 111,000 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	$	152		$	112
Direct labor	$	19		$	10

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase orders issued	$	244,200
Processing	Machine-hours		3,030,000
Scrap/rework	Scrap/rework orders issued		703,800
Shipping	Number of shipments		1,396,500
		$	5,374,500

	Expected Activity
Activity Measure	Deluxe	Regular	Total
Purchase orders issued	440	880	1,320
Machine-hours	20,200	30,300	50,500
Scrap/rework orders issued	575	460	1,035
Number of shipments	5,880	8,820	14,700

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

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Siegel Company
Answer 3
Calculation of ABC rates for overhead		A	B	C=A/B
Activity cost pool	Cost Driver	Cost	Cost Driver	ABC rates
Purchasing	Purchase orders issued	244,200.00	1,320.00	185.00
Processing	Machine Hours	3,030,000.00	50,500.00	60.00
Scrap/rework	Scrap/rework orders issued	703,800.00	1,035.00	680.00
Shipping	Number of Shipments	1,396,500.00	14,700.00	95.00
Total Cost assigned		5,374,500.00

Answer 3 a		See C	D	E=C*D	F	G=C*F	H=D+F	I=E+G
Allocation table			Deluxe	Regular	Total
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned	Activity used	Cost assigned
Setups	Production runs	185.00	440.00	81,400.00	880.00	162,800.00	1,320.00	244,200.00
Inspection	Inspection hours	60.00	20,200.00	1,212,000.00	30,300.00	1,818,000.00	50,500.00	3,030,000.00
Power	Machine Hours	680.00	575.00	391,000.00	460.00	312,800.00	1,035.00	703,800.00
Maintenance	Maintenance hours	95.00	5,880.00	558,600.00	8,820.00	837,900.00	14,700.00	1,396,500.00
Total Cost assigned				2,243,000.00		3,131,500.00		5,374,500.00	J
Units produced				12,000.00		111,000.00			K
Manufacturing overhead cost per unit				186.92		28.21			L=J/K

Answer 3 b
Cost per unit	Deluxe	Regular
Direct materials	152.00	112.00
Direct Labors	19.00	10.00
Overhead Allocated	186.92	28.21	See L
Cost per unit	357.92	150.21