Question

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

	Deluxe			Standard
Direct materials per unit	$	56.00		$	44.00
Direct labor per unit	$	14.00		$	11.60
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	$	538,000
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)	$	385,000	7,000	70,000	77,000
Batch setups (setups)		96,000	200	100	300
Safety testing (tests)		57,000	30	70	100
Total manufacturing overhead cost	$	538,000

Answer 1

Solution 1:

Predetermined overhead rate = Estimated total manufacturing overhead / Estimated total direct labor-hours = $538,000 / 77000 = $6.99 per labor hour

Computation of unit product cost - Stillicum Corporation (Traditional costing)
Particulars	Deluxe	Standard
Direct material	$56.00	$44.00
Direct labor	$14.00	$11.60
Manufacturing overhead	$4.89	$9.79
Unit Product Cost	$74.89	$65.39

Solution 2:

Determination of overhead rate and allocated overheads to product lines and overheaed cost per unit- Activity based costing
Activity	Estimated Overhead Cost	Usage of Activity Base	Activity Rate	Deluxe		Standard
				Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor	$385,000.00	77000	$5.00	7000	$35,000.00	70000	$350,000.00
Batchsetup	$96,000.00	300	$320.00	200	$64,000.00	100	$32,000.00
Safety Testing	$57,000.00	100	$570.00	30	$17,100.00	70	$39,900.00
Total	$538,000.00				$116,100.00		$421,900.00
Nos of units					10000		50000
Overhead cost per unit					$11.61		$8.44

Computation of unit product cost - Stillicum Corporation (Activity Based costing)
Particulars	Deluxe	Standard
Direct material	$56.00	$44.00
Direct labor	$14.00	$11.60
Manufacturing overhead	$11.61	$8.44
Unit Product Cost	$81.61	$64.04