Question

Tommy Lyons Company manufactures and sells two products: Product S3 and Product S2. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce the output appear below:

Product Info

Product S3:  800 units @ 8.0 DLH/unit = 6,400 hours

Product K2:  900 units @6.0 DLH/unit = 5,400 hours

Direct Material Cost/Unit

The direct labor rate is $18.00 per DLH. The direct materials cost per unit for each product is given below:

Product S3: $280.70

Product K2: $157.90

Activity Cost Pools

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, total overhead costs and expected activity for each product.

Labor Related

Direct labor hours, total OH $523,094

S3 = 6,400

K2 = 5,400

Total = 11,800 DLHs

Machine Set-ups

Number of tests, total OH = $135,478

S3 = 600

K2 = 800

Total = 1,400 Tests

General Factory

Machine hours, total OH = $392,327

S3 = 5,000

K2 = 5,300

Total = 10,300 MHs

Total Overhead Costs

Including: DLHs, machine set-ups, machine hours = $1,050,899

Required:

The company currently uses a traditional costing methodin which overhead is applied to products based solely on direct labor-hours. Compute the company's predetermined overhead rate under this costing method.

How much overhead would be applied to each product under the company's traditional costing method?

Determine the unit product cost of each product under the company's traditional costing method.

Compute the activity rates under the activity-based costing system.

Determine how much overhead would be assigned to each product under the activity-based costing system.

Determine the unit product cost of each product under the activity-based costing method.

What is the difference between the overhead per unit under the traditional costing method and the activity-based costing system for each of the two products?

Answer 1

A. Calculation of pre determined Overhead rate (Traditional Costing)
Total Overhead Cost	$1,050,899
Total Available Direct Labour Hours	11800
Overhead Rate ( Overhead Cost/ total Direct Labour hours)	89.06 (Approx)

B. Apportionment of Overhead (Traditional Costing)
Particulars	S3	K2
Total Direct Labours Required (Given)	6400	5400
Overhead Rate	89.06	89.06
Apportioned Overhead (DLH* Ovhd rate)	569979.12	480919.88
Total number of units	800	900
Overhead Per Unit	712.5	534.4

C. Calculation of Unit Cost (Traditional Costing)
Particulars	S3	K2
Direct Material	280.7	157.9
Direct Labour	144	108
Overhead Cost	712.5	534.4
Total Unit Cost	1137.17	800.26

D. Calculation of Activity Rate Under ABC Cost Activity Amount Cost Driver Total No of driver Activity Rate Labour related Overhead 523094 Direct Labour hours 11800 44.33 Machine set ups 135478 No of tests 1400 96.77 General factory Machine Hours 392327 Machine Hours 10300 38.09

E. Apportionment of Overhead using ABC Particulars S3 K2 Labour related Overhead No of Hours 6400 5400 Rate 44.33 44.33 Overhead (A) 283712 239382 Machine set ups No of tests 600 800 Rate 96.77 96.77 Overhead (B) 58062 77416 General factory Machine Hours No of machine Hours 5000 5300 Rate 38.09 38.09 Overhead © 190450 201877 Total Apportioned overhead (A+B+C) 532224 518675