Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below:

	Flexible		Rigid
Direct materials cost per unit	$	110.00	$	80.00
Direct labor cost per unit	$	30.00	$	15.00

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

				Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost			Flexible			Rigid			Total
Purchase orders (number of orders)	$	20,000			100			300		400
Rework requests (number of requests)		10,000			60			140		200
Product testing (number of tests)		210,000			900			1,200		2,100
Machine related (machine-hours)		360,000			1,500			2,500		4,000
	$	600,000

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

Answer 1

1-a Predetermined rate = Estimated Overheads/Estimated Labor hours

= 600,000/(1,000*2+10,000*1)

= $50

Unit cost
	Flexible	Rigid
Direct material	110	80
Direct Labor	30	15
Overhead	100	50
Cost per unit	240	145
Rate = Overhead/Total Activity
Purchase Orders	500
Rework Requests	50
Product Testing	100
Machine Related	90
Overhead Assigned = Activity Rate*Driver Consumption
	Flexible	Rigid
Purchase Orders	50,000	150,000
Rework Requests	3,000	7,000
Product Testing	90,000	120,000
Machine Related	135,000	225,000
Unit Cost
	Flexible	Rigid
Direct material	110	80
Direct Labor	30	15
Overhead	135	22.50
Cost per unit	275	117.5