Question

Exercise 4-10 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

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	$	65.60		$	51.80
Direct labor cost per unit	$	19.00		$	13.80
Direct labor-hours per unit		1.4	DLHs		1	DLHs
Estimated annual production and sales		33,000	units		83,000	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	$2,687,360
Estimated total direct labor-hours	129,200	DLHs

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

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)	$	988,380			46,200			83,000		129,200
Batch setups (setups)		1,008,000			290			190		480
Product sustaining (number of products)		602,240			1			1		2
General factory (machine-hours)		88,740			3,300			8,300		11,600
Total manufacturing overhead cost	$	2,687,360

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

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

Answer 1

Solution 1a:

predetermined overhead rate = Estimated overhead / Estimated direct labor hours

= $2,687,360 / 129200 = $20.80 per direct labor hour

Solution 1b:

Computation of unit product cost - Traditional costing
Particulars	Xactive	Pathbreaker
Direct material per unit	$65.60	$51.80
Direct labor per unit	$19.00	$13.80
Manufacturing overhead cost per unit (Direct labor hour per unit * Overhead rate per direct labor hour)	$29.12	$20.80
Unti Product Cost	$113.72	$86.40

Solution 2 and 3:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xactive		Pathbreaker
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$988,380.00	Direct Labor hours	129200	$7.65	46200	$353,430.00	83000	$634,950.00
Batch Setups	$1,008,000.00	Setups	480	$2,100.00	290	$609,000.00	190	$399,000.00
Product sustaining	$602,240.00	Number of products	2	$301,120.00	1	$301,120.00	1	$301,120.00
General Factory	$88,740.00	Machine hours	11600	$7.65	3300	$25,245.00	8300	$63,495.00
Total	$2,687,360.00					$1,288,795.00		$1,398,565.00
Nos of units						33000		83000
Allocated overhead per unit						$39.05		$16.85

Computation of unit product cost - Activity Based costing
Particulars	Xactive	Pathbreaker
Direct material per unit	$65.60	$51.80
Direct labor per unit	$19.00	$13.80
Manufacturing overhead cost per unit	$39.05	$16.85
Unti Product Cost	$123.65	$82.45