Question

Lillis Manufacturing makes a variety of industrial fittings. The products are similar, but not identical, and all go through the same processes. Some orders from Lillis go to companies in regions with strict environmental regulations. Lillis is required to conduct compliance tests on those orders before shipment.

The company produces to order and uses a job costing system. Overhead is applied to jobs based on direct labor cost. The cost analyst at Lillis recently put together an estimate of overhead for the coming year, which is shown in the following table.

Category	Amount
Machining	$	1,312,000
Assembly		1,112,000
Setup labor		1,232,000
Packaging		1,092,000
Compliance testing		1,012,000
Total	$	5,760,000

Three jobs were started and completed in November. Details on the jobs follow.

	Job 1101			Job 1102			Job1103
Direct materials	$	7,800		$	8,280		$	7,375
Direct labor	$	19,500		$	22,080		$	19,175
Number of units		390			690			590
Direct labor hours		240			800			360
Machine hours		690			890			790
Production runs		1			2			1
Compliance testing required?		Yes			No			Yes

Lillis is considering adopting an activity-based costing system. The cost analyst has studied the system and has recommended the following cost drivers for each of the overhead categories. She has also estimated the annual volume for each of the cost drivers. This information follows.

Overhead Category	Cost Driver	Annual Cost Driver Volume
Machining	Machine hours		65,600	machine-hours
Assembly	Direct-labor hours		16,000	direct-labor hours
Setup labor	Production runs		80	production runs
Packaging	Units		728,000	units
Compliance testing	Orders tested		20	orders tested

The average direct labor rate at Lillis is $120 per hour.

Required:
a. What is the unit cost for each of the three jobs started and completed assuming Lillis uses their current costing system? (Round your answers to 2 decimal places.)
b. What is the unit cost for each of the three jobs started and completed assuming Lillis adopts the ABC system as designed by the cost analyst? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

a)
Computation of overhead rate under current costing system: :-
Total Estimated Overheads Costs	5,760,000
Direct labor costs 16000 *$ 120	1920000
Plantwide overhead rate = Total Estimated Overheads Costs/ Direct labor costs	300%	of Direct labor cost
	Job 1101	Job 1102	Job1103
Direct materials	$             7,800	$               8,280	$                7,375
Direct labor	$           19,500	$             22,080	$              19,175
Manufacturing Overhead = DL x 300%	$           58,500	$             66,240	$              57,525
Total Manufacturing cost (a)	$           85,800	$             96,600	$              84,075
Units produced (b)	$                390	$                  690	$                   590
Cost per unit	$                220	$                  140	$                   143
Activity Cost pool	Estimated Overhead Cost (a)	Activity Drivers (b)	Activity rate a/b
Machining	1,312,000	65,600	$                20.00	per machine hour
Assembly	1,112,000	16,000	$                69.50	per direct labor hour
Setup labor	1,232,000	80	$         15,400.00	per production run
Packaging	1,092,000	728,000	$                  1.50	per unit
Compliance testing	1,012,000	20	$         50,600.00	per order tested
Machining	$      13,800.00	$        17,800.00	$         15,800.00
Assembly	$      16,680.00	$        55,600.00	$         25,020.00
Setup labor	$      15,400.00	$        30,800.00	$         15,400.00
Packaging	$           585.00	$          1,035.00	$              885.00
Compliance testing required	$      50,600.00	0	$         50,600.00
Total Overhead	$      97,065.00	$      105,235.00	$       107,705.00
	Job 1101	Job 1102	Job1103
Direct materials	$             7,800	$               8,280	$                7,375
Direct labor	$           19,500	$             22,080	$              19,175
Manufacturing Overhead =	$           97,065	$           105,235	$            107,705
Total Manufacturing cost (a)	$         124,365	$           135,595	$            134,255
Units produced (b)	$                390	$                  690	$                   590
Cost per unit (a) /(b)	$                319	$                  197	$                   228