Question

ENRIC Company produces multiple products. The company is currently using a traditional system. Total overhead is projected to amount to $2,300,000. The company uses machine hours as its allocation base. ENRIC expects 200,000 machine hours to be worked plant wide. However, the firm is considering changing to an ABC System. Here, overhead will be separated into four cost pools: Machining, Processing, Setup, and Assembling. Machining, Processing, Setup, and Assembling costs are projected to amount to $800,000, $485,000, $500,000, and $515,000 respectively. Plantwide machine hours are expected to amount to 200,000. The number of processing hours is expected to amount to 2,850,000. The number of production runs is expected to amount to 5000, and direct labor hours will amount to 400,000.   

Listed below is actual cost information related to two products:

                                                Product Y                                             Product Z

Direct Materials                $150,000                                              $210,000

Direct Labor                        $170,000                                              $260,000

Machine Hours                  2,400 hours                                        22,000 hours

Processing Hours              1,200 hours                                        400 hours

Production Runs               24 runs                                                 144 runs

Direct Labor Hours           5,000 hours                                        10,000 hours                                                     

Units Produced                 500 units                                             800 units

A) Under the traditional system, compute the predetermined overhead rate.

B) Under the traditional system, apply overhead to both products.

C) Under the traditional system, compute the unit cost.

D) Under the ABC Method, calculate the appropriate activity rates

E) Apply overhead to both products using the ABC Method.

F) Compute unit cost for each product under the ABC Method

Answer 1

A)	Predetermined OH Rate = 2300000/200000 =	11.5	per MH
B)		Product Y	Product Z
	Machine hours	$           2,400	$         22,000
	Overhead applied at $11.50 per MH	$        27,600	$      253,000
C)	Direct materials	$      150,000	$      210,000
	Direct labor	$      170,000	$      260,000
	Overhead applied	$        27,600	$      253,000
	Total cost	$      347,600	$      723,000
	Number of units producted	500	800
	Cost per unit	$        695.20	$         903.75
D)	Cost pool	Overhead	Activity	Activity Units	Activity Rate
	Machining	800000	200000	MH	$           4.00
	Processing	485000	2850000	Labor hours	$           0.17
	Setup	500000	5000	# set ups	$       100.00
	Assembling	515000	400000	Processing hours	$           1.29
E)		Product Y	Product Z
	Machining	$           9,600	$         88,000
	Processing	$              204	$                 68
	Setup	$           2,400	$         14,400
	Assembling	$           6,438	$         12,875
		$        18,642	$      115,343
`	Direct materials	$      150,000	$      210,000
	Direct labor	$      170,000	$      260,000
	Overhead applied	$        18,642	$      115,343
	Total cost	$      338,642	$      585,343
	Number of units producted	500	800
	Cost per unit	$        677.28	$         731.68