Question

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

	EX300			TX500			Total
Direct materials	$	366,325		$	162,550		$	528,875
Direct labor	$	120,000		$	42,500		$	162,500

The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below:

				Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead			EX300			TX500			Total
Machining (machine-hours)	$	198,250			90,000			62,500			152,500
Setups (setup hours)		150,000			75			300			375
Product-level (number of products)		100,250			1			1			2
General factory (direct labor dollars)		60,125		$	120,000		$	42,500		$	162,500
Total manufacturing overhead cost	$	508,625

Required:

1-a. Compute the plantwide overhead rate that would be used in the company’s conventional cost system.

1-b. Using the plantwide rate, compute the unit product cost for each product.

2-a. Compute the activity rate for each activity cost pool.

2-b. Using the activity rates, compute the unit product cost for each product.

Answer 1

1a. Plantwide overhead rate = Total manufacturing overhead cost/direct labor dollars = 508,625/162,500 = 3.13

1b.

Particulars	EX300	TX500
Plantwide overhead rate	3.13	3.13
General factory activity	120,000	42500
Total activity	375,600	133,025
Number of units	60,000	12,500
Rate per general factory activity	6.26	10.642
Direct materials	6.11 (366,325/60,000)	13.004 (162,550/12500)
Direct labor	2 ($120,000/60,000)	3.4 (42,500/12500)
Unit product cost	14.37	27.046

2a.

	Manufacturing overhead (A)	Activity total (B)	Cost per activity (A/B)
Machining	198,250	152,500	1.3
Setups	150,000	375	400
Product level costs	100,250	2	50,125
General factory	60,125	162500	0.37

2b.

	Cost per activity (A/B)	EX300	TX500
Machining	1.3	1.3*90,000 =117,000	1.3*62,500= 81,250
Setups	400	400*75 = 30,000	400*30 = 12,000
Product level costs	50,125	50,125	50,125
General factory	0.37	0.37*120,000 = 44,400	0.37*42500 = 15,725
Total	241,525	159,100
Number of units	60,000	12500
Overhead rate per unit	4.025	12.728
Direct materials	6.11 (366,325/60,000)	13.004 (162,550/12500)
Direct labor	2 ($120,000/60,000)	3.4 (42,500/12500)
Unit product cost	12.135	29.132