Question

Makes two products and uses a traditional costing system in which a single plantwide predetermined overhead rate is computed on direct labour hours. Data for the two products for the upcoming year follow:

Direct Materials cost per unit	28.00	10.00
Direct labour Cost per unit	5	7.4
Direct labour hours per unit	1	1.1
Number of units produced	38000	90000

1. The company's manufacturing overhead costs for the year are expected to be 1644000. Using the company's traditional costing system, compute the unit product costs for the 2 products. Compute the Unit product cost for both.

2. They are considering an activity-based absorption costing system in which half of the overhead would continue based on the direct labour hours and a half would be allocated based on engineering design time. Time is distributed as follow. Compute the unit product costs based on the absorption costing method.

Engineering design time in hours	9600	9600	19200

Answer 1

1)

	Product1	Product 2	Total
Direct labor hours per unit	1	1.1
Multiply by :Number of units	38000	90000
Total direct labor hours	38000	99000	137000

Predetermined overhead rate =Estimated overhead /estimated direct labor hours

           = 1644000 /137000

           = $ 12 per DLH

	1	2
Direct material	28	10
Direct labor	5	7.4
overhead applied (Number of hours per unit * overhead rate)	1*12=12	1.1*12= 13.2
Unit cost	45	30.6

2)

	Activity rate	Allocation to product 1	Allocation to product 2
	Estimated overhead	/	Estimated activity	=	Activity rate	Actual activity	Allocation to product 1	Actual activity	Allocation to product 2
Overhead 1	1644000*1/2=822000		137000		6	38000	38000*6=228000	99000	99000*6= 594000
Overhead 2 (based on engineering design)	822000		19200		42.8125	9600	9600*42.8125= 411000	9600	411000
Total overhead allocated							639000		1005000
Number of units							38000		90000
overhead cost per unit							639000/38000= 16.82		11.17

	1	2
Direct material	28	10
Direct labor	5	7.4
overhead applied	16.82	11.17
Unit cost	49.82	28.57