Question

Alabama Company manufactures two products, Product A and Product B. The company estimated it would incur $160,970 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor-hours. Data concerning the current period's operations appear below:

	Product A			Product B
Estimated volume		4,200	units			6,000	units
Direct labor-hours per unit		1.20	hour			2.20	hours
Direct materials cost per unit	$	8.60			$	13.00
Direct labor cost per unit	$	10.20			$	19.00

Required:

a. Compute the predetermined overhead rate under the current method and determine the unit product cost of product A for the current year (ie.the total of direct materials, direct labor and overhead per unit).

b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor-hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

							Expected Activity
Activity Cost Pool	Estimated Overhead Costs						Product A			Product B			Total
Machine setups		$	12,200					70			160			230
Purchase orders			79,220					720			930			1,650
General Factory (square feet)			69,550					4,860			9,020			13,880
		$	160,970

Determine the unit product cost of product A for the current period using the activity-based costing approach (ie.the total of direct materials, direct labor and overhead per unit).

c   At the end of the year, records show that 18,500 hours of direct labor were used and actual overhead costs were $160,800. What is the over- or under-applied overhead for the year? Be sure to indicate whether it is over or under applied.

Answer 1

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