Question

QUESTION: Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company’s two product lines appear below:

	Deluxe			Standard
Direct materials per unit	$	57.00		$	45.00
Direct labor per unit	$	15.00		$	12.40
Direct labor-hours per unit		0.70	DLHs		1.40	DLHs
Estimated annual production		10,000	units		50,000	units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$	619,000
Estimated total direct labor-hours		77,000	DLHs

Required:

1. Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools:  

			Expected Activity
Activity Cost Pools and Activity Measures	Estimated Overhead Cost		Deluxe	Standard	Total
Supporting direct labor (direct labor-hours)	$	462,000	7,000	70,000	77,000
Batch setups (setups)		99,000	200	100	300
Safety testing (tests)		58,000	30	70	100
Total manufacturing overhead cost	$	619,000

Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Answer 1

Req a:
Pre-determined OH rate per DLH
Estimated Overheads			619000
Divide: Estimated dLH			77000
OH rate per DLH			8.04
Unit Product cost
			Deluxe	Standard
Material perr unit			57	45
Labour ccost per unit			15	12.4
OH per unit
Deluxe (0.70*8.04)			5.628
Standard (1.40*8.04)				11.256
Unit product cost			77.628	68.656
Req b:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Supporting labour			DLH	462000	77000	6.00
Batch setups			Setups	99,000	300	330.00
Safety testing			Tests	58,000	100	580.00
OH cost per unit
			Deluxe		Standard
Activity		Rate	Activity	OH	Activity	OH
Supporting labour		6	7000	42000	70000	420000
Batch setups		330	200	66000	100	33000
Safety testing		580	30	17400	70	40600
		Total OH		125400		493600
		Divide: Units		10000		50000
		OH per unit		12.54		9.872
Units product cost
			Deluxe	Standard
Material perr unit			57	45
Labour ccost per unit			15	12.4
OH per unit			12.54	9.872
Unit product cost			84.54	67.272