Question

green & red manufactures two products, Product 2 and Product 8. Product 8 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product 2. Product 8 is the more complex of the two products, requiring two hours of direct labour time per unit to manufacture compared to one hour of direct labour time for Product 2. Product 8 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 $450,000 in manufacturing overhead costs and produce 7,500 units of Product 8 and 30,000 units of Product 2 during the current year. Unit costs for materials and direct labour are:

		Product 2	Product 8
Direct Labour		10	20
Direct Material		12	25

Required:

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:

Expected Activity Activity Costs Pools Estimated Overhead Costs Product 2 Product 8 Total Machine set-ups required $180,000 600 1,200 1,800 Purchase orders issued 38,382 500 100 600 Machine-hours required 92,650 6,800 10,200 17,000 Maintenance requests issued 138,968 693 907 1,600 $450,000 Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Answer 1

A
		Product 2	Product 8	Total
	Direct Labor Hours PU	1	2
	Units to be Manufactured	30000	7500
	Total Direct Labor Hours	30000	15000	45000
	Overhead Cost	450000
	Total Direct Labor Hours	45000
	Overhead Rate Per DLH	10.00
	Unit Product Costs:	Product 2	Product 8
	Direct Material	12.00	25.00
	Direct Labor	10.00	20.00
	Overhead Cost	10.00	20.00	(Overhead Rate*DLH PU)
	Total Unit Product Costs	32.00	65.00
		A			B	A/B
B	Activity Costs Pools	Estimated OH	Product 2	Product 8	Total	Activity Rate
	Machine Setup	180000	600	1200	1800	100.00
	PO issued	38382	500	100	600	63.97
	MH Required	92650	6800	10200	17000	5.45
	Maintainance requests	138968	693	907	1600	86.86
		450000
	Allocation of Overhead Costs to Products:
	Activity Costs Pools	Product 2	Product 8	Total
	Machine Setup	60000	120000	180000	(Activity Rate * Used by Product)
	PO issued	31985	6397	38382	(Activity Rate * Used by Product)
	MH Required	37060	55590	92650	(Activity Rate * Used by Product)
	Maintainance requests	60191	78777	138968	(Activity Rate * Used by Product)
	Overhead Costs	189236	260764	450000
	Units to be Manufactured	30000	7500
	Overhead Cost PU	6.31	34.77
	Unit Product Costs:	Product 2	Product 8
	Direct Material	12.00	25.00
	Direct Labor	10.00	20.00
	Overhead Cost	6.31	34.77
	Total Unit Product Costs	28.31	79.77