Question

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

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,665,100 in manufacturing overhead cost and produce 17,000 units of the deluxe model and 115,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows:

	Model
	Deluxe			Regular
Direct materials	$	149		$	115
Direct labor	$	13		$	7

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase orders issued	$	215,250
Processing	Machine-hours		4,950,000
Scrap/rework	Scrap/rework orders issued		707,850
Shipping	Number of shipments		792,000
		$	6,665,100

	Expected Activity
Activity Measure	Deluxe	Regular	Total
Purchase orders issued	410	820	1,230
Machine-hours	22,000	33,000	55,000
Scrap/rework orders issued	550	440	990
Number of shipments	5,280	7,920	13,200

Determine the predetermined overhead rate for each of the four activity cost pools.

3. Using the predetermined overhead rates you computed in part (2), do the following:

a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.

b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).

Answer 1