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 $990,000 in overhead costs would be incurred and the company would produce and sell 2,000 units of the flexible model and 10,000 units of the rigid model. The flexible model requires 2.0 hour(s) of direct labor time per unit, and the rigid model requires 1.40 hour(s). Direct materials and labor costs per unit are given below:

  

	Flexible		Rigid
Direct materials cost per unit	$	130	$	75
Direct labor cost per unit	$	25	$	10

   

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)	$	24,000	140	260	400
Rework requests (number of requests)		14,000	80	120	200
Product testing (number of tests)		230,000	1,100	900	2,000
Machine related (machine-hours)		722,000	1,300	7,725	9,025
	$	990,000

     

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

3.	Using activity-based costing, do the following:

a.	Determine the total amount of overhead that would be assigned to each model for the year.

    

b.	Compute the unit product cost for one unit of each model. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

Req 1a:
Total overheads: $ 990,000
Total labour hours
Flexible (2,000 units @2)			4000
Rigid (10,000 units @1.4 hours)			14000
Total Labouor hours			18000
Pre-determined overhead rate: Estimated Overheads / Total labour hours
			(990,000 /18,000 hours) = $ 55 per hours
Overheads assigned:
			Flexible	Rigid
Total labouor hours			4000	14000
rate per hour			55	55
Total Overheads			220000	770000
Number of units			2000	10000
OH cost per unit			110	77
	OVERHEAD ASSIGNed
Flexible	$220,000
Rigid	$770,000
Req 1B:
			Fexible	Rigid
Direct material			130	75
Direct labour			25	10
OH cost per unit			110	77
Unit cost per unit			265	162
Req 2:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Purchase orders			Orders	24000	400	60	per roder
Rework request			Request	14,000	200	70	per request
Product testing			Test	230,000	2,000	115	per test
machine related			MH	722,000	9,025	80	per MH
Req 3:
Assignment of Overheads
			FLEXIBLE			RIGID
Activity	Activity rate		Activity Incurred		Amount	Activity Incurred		Amount
Purchase orders	$60	per order	140		$8,400	260		$15,600
Rework request	$70	per request	80		$5,600	120		$8,400
Product testing	$115	per test	1100		$126,500	900		$103,500
machine related	$80	per MH	1300		$104,000	7725		$618,000
		Total overheads			$244,500			$745,500
		Number of units			2000			10000
		OH cost per unit			$122.25			$74.55
Req 3b:
			Fexible	Rigid
Direct material			130	75
Direct labour			25	10
OH cost per unit			122.25	74.55
Unit cost per unit			277.25	159.55