Question

Required information

[The following information applies to the questions displayed below.]

For many years, Yelena Company manufactured a single product called a Mono-Relay. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called a Bi-Relay that has become increasingly popular. The Bi-Relay is a more complex product, requiring 1.00 hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The Mono-Relay requires only 0.50 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the company’s new Bi-Relay, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Materials and labor costs per unit are given below:

	Mono-Relay			Bi-Relay
Direct materials	$	66.00		$	81.00
Direct labor (0.50 hour and 1.00 hour @ $17.00 per hour)	$	8.50		$	17.00

Management estimates that the company will incur $735,360 in manufacturing overhead costs during the current year and 18,000 units of the Mono-Relay and 7,000 units of the Bi-Relay will be produced and sold.

2.	Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following four activity cost pools:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Maintaining parts inventory	Number of part types	$	128,960
Processing purchase orders	Number of purchase orders		224,800
Quality control	Number of tests run		309,240
Machine related	Machine-hours		72,360
		$	735,360

	Expected Activity
Activity Measure	Mono-Relay	Bi-Relay	Total
Number of part types	656	956	1,612
Number of purchase orders	3,356	1,140	4,496
Number of tests run	5,756	9,706	15,462
Machine-hours	1,156	1,256	2,412

       

Answer 1

Activity Cost Pool	Activity Measure	Estimated	Activity	Activity rate	Mons relay
		Overhead	driver A	R=C*A	activity driver	Cost allocated R*D	activity driver	Cost allocated R*E
		Cost C			D		E
Maintaining parts inventory	Number of part types	128960	1612	80	656	52480	956	76480
Processing purchase orders	Number of purchase orders	224800	4496	50	3356	167800	1140	57000
Quality control	Number of tests run	309240	15462	20	5756	115120	9706	194120
Machine related	Machine-hours	72360	2412	30	1156	34680	1256	37680
				Overhead cost		370080		365280
				No. of units produced		18000		7000
				Overhead cost per unit		20.56		52.18
Product cost per unit using ABC
	Mono-Relay	Bi-Relay
Direct materials	$66	$81		$	81
Direct labor	$8.50	$17
Manufacturing overhead	20.56	52.18
Total product cost	$95.06	$150.18
Product cost per unit using traditional method
	Mono-Relay	Bi-Relay
Direct materials	$66	$81
Direct labor	$8.50	$17
Manufacturing overhead	22.98	45.96
	(45.96*.5)
Total product cost	$97.48	$143.96