Question

The green and red Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are:

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. 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 Costs Pools Estimated Overhead Costs Product 1 Product 2 Total Machine set-ups required $170,000 700 1,000 1,700 Purchase orders issued 37,000 300 200 500 Machine-hours required 91,000 4,000 9,000 13,000 Maintenance requests issued 98,000 400 600 1,000 $396,000

Answer 1

	Product 1	Product 2	Total
Direct labor time per unit	1.5	3
Units Produced	22000	5500
Total Labor Hr	33000	16500	49500
Overhead Per Unit (1.5*8 ,3*8)	12	24

Overhead Allocation Rate=396000/49500

8.00

Per DLH

Determine the unit product cost of each product for the current year.

	Product 1	Product 2
Direct material	9	20
Direct labour	7	15
Overhead Per Unit	16	35
unit product cost	32	70

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

		Cost Allocated based on Actvity
	Total Cost	Product A	Product B
Machine setups	$170,000	70000	100000
Purchase orders	37000	22200	14800
Machine-hours	91000	28000	63000
Maintenance requests	98000	39200	58800
Total	396000	159400	236600
		22000	5500
Overhead Cost Per Unit		7.25	43.02

	Product 1	Product 2
Direct material	9	20
Direct labour	7	15
Overhead Per Unit	7.25	43.02
unit product cost	23.25	78.02