Question

Exercise 3-10 Contrasting ABC and Conventional Product Costs [LO3-2, LO3-3, LO3-4]

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

	Xactive			Pathbreaker
Direct materials per unit	$	65.20		$	51.40
Direct labor cost per unit	$	18.60		$	13.40
Direct labor-hours per unit		1.4	DLHs		1	DLHs
Estimated annual production and sales		29,000	units		79,000	units

The company has a conventional 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	$2,439,840
Estimated total direct labor-hours	119,600	DLHs

Required:

1-a.		Compute the predetermined overhead rate based on direct labor-hours. (Round the intermediate calculations and final answer to two decimal places.)

1-b.		Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product. (Round the intermediate calculations and final answer to two decimal places.)

2.	The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

  

	Estimated Overhead Cost		Expected Activity
Activity Cost Pools and Activity Measures			Xactive	Pathbreaker	Total
Supporting direct labor (direct labor-hours)	$	891,020	40,600	79,000	119,600
Batch setups (setups)		836,000	270	170	440
Product sustaining (number of products)		632,360	1	1	2
General factory (machine-hours)		80,460	2,900	7,900	10,800
Total manufacturing overhead cost	$	2,439,840

	Determine the activity rate for each of the four activity cost pools. (Round your final answers to 2 decimal places.)

3.	Using the activity rates and other data from the problem, determine the unit product cost of each product. (Round the intermediate calculations and final answer to two decimal places.)

Answer 1

1-a.	Predetermined overhead rate			$         20.40	per DLH
Woring:
	Overhead rate		=	Estimated total manufacturing overhead				/	Estimated total direct labor-hours
			=	$   24,39,840				/	1,19,600
			=	$         20.40
1-b.				Xactive	Pathbreaker
	Unit Product Cost			$       112.36	$         85.20
Working:
a. Direct Labor hours of each product
			Units	Direct labor hours per unit			Total direct labor hours
	Xactive		29,000	1.4			40,600
	Pathbreaker		79,000	1			79,000
b. Overhead assigned
			DLH	Overhead rate			Total Overhead cost
	Xactive		40,600	$         20.40			$       8,28,240
	Pathbreaker		79,000	$         20.40			$     16,11,600
c. Overhead cost per unit
			Overhead	Units			Overhead per unit
	Xactive		8,28,240	29,000.0			$           28.56
	Pathbreaker		16,11,600	79,000.0			$           20.40
d. Unit product cost
			Xactive	Pathbreaker
Direct Material			$     65.20	$         51.40
Direct Labor			$     18.60	$         13.40
Overhead			$     28.56	$         20.40
Unit Product Costs			$   112.36	$         85.20
2)	Activity Cost Pools			Activity Rate
	Supporting direct labor			$           7.45
	Batch setups			$     1,900.00
	Product sustaining			$3,16,180.00
	General factory			$           7.45
Working:
	Activity Cost Pools			Estimated Overhead Cost			Total expected activity		Activity rate
				a			b		a/b
	Supporting direct labor			$     8,91,020			1,19,600		$           7.45
	Batch setups			$     8,36,000			440		$     1,900.00
	Product sustaining			$     6,32,360			2		$3,16,180.00
	General factory			$       80,460			10,800		$           7.45
3)	Unit product cost
				Xactive	Pathbreaker
	Direct Material			$         65.20	$         51.40
	Direct Labor			$         18.60	$         13.40
	Overhead			$         39.77	$         16.29
	Unit Product Costs			$       123.57	$         81.09
Working:
a. Overhead assignnment
				Xactive					Pathbreaker
	Activity Cost Pools			Expected Activity		Activty rate	Overhead costs		Expected Activity		Activty rate	Overhead costs
				a		b	a*b		c		d	c*d
	Supporting direct labor			40,600		$           7.45	$       3,02,470		79,000		$           7.45	$      5,88,550.0
	Batch setups			270		$     1,900.00	$       5,13,000		170		$     1,900.00	$      3,23,000.0
	Product sustaining			1		$3,16,180.00	$       3,16,180		1		$3,16,180.00	$      3,16,180.0
	General factory			2,900		$           7.45	$         21,605		7,900		$           7.45	$         58,855.0
							$     11,53,255					$       12,86,585
b. Units overhead cost
				Xactive	Pathbreaker
	Overhead costs		a	$   11,53,255	$   12,86,585
	Units		b	29,000	79,000
	Unit Overhead costs		a/b	$         39.77	$         16.29