Question

For many years, Sinclair Graphic Design has provided design and digital-printing services for indoor banners. The nylon banners, which come in a standard size, are used for a variety of purposes, including trade shows, sporting events, and other promotional activities. Three years ago, the company introduced a second printing and production service for outdoor banners that has become increasingly popular. The outdoor banners are a more complex product than the indoor banners, requiring weatherproof vinyl materials and a different printing process to improve the visibility of the text and graphics content. Moreover, outdoor banners are printed in smaller production runs because of less frequent orders; the setup of the printing equipment takes longer; and, since higher durability is needed to withstand the elements, more quality inspections are needed. Under the traditional costing approach, overhead costs are assigned to the products on the basis of direct labour-hours.

Despite the introduction of the new outdoor banners, profits have declined steadily over the past three years. Management is beginning to believe that the company’s costing system may be at fault. Unit costs for materials and labour for the two products follow:

	Indoor banners			Outdoor banners
Direct materials	$	14.50		$	32.60
Direct labour ($19 per hour)	$	19		$	57
Management estimates that the company will incur $1,920,000 in overhead costs during the current year and that 16,000 indoor banners and 3,200 outdoor banners will be produced and sold. 1-a. Compute the predetermined overhead rate assuming that the company continues to apply overhead cost to products on the basis of direct labour-hours. (Round your answer to 2 decimal places.) 1-b. Using this rate and other data from the problem, determine the unit product cost of each product.(Round your answers to 2 decimal places.) 2. Management is considering using ABC to apply manufacturing overhead costs to products for external financial reports. Some preliminary work has been done, and the data that have been collected are displayed below. Using these data, calculate the predetermined overhead rate for each activity cost pool identified below. (Round your answers to 2 decimal places.)

				Activity Measure
	Estimated Total Overhead Costs			Indoor Banners		Outdoor Banners		Total
Order processing (orders received)	$	480,000		800		800		1,600
Print setup (number of batches)		160,000		1,280		320		1,600
Artwork and graphic design (labour-hours)		1,120,000		11,200		11,200		22,400
Quality control (number of inspections)		160,000		640		640		1,280
Total overhead cost	$	1,920,000
Activity Center Predetermined Overhead Rate Order processing per order Print setup per setup Graphic design per hour Quality control per inspection

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

a. Determine the total amount of manufacturing overhead cost that would be applied to each product using the ABC system. After these totals have been computed, determine the amount of overhead cost per unit of each product.

	Overhead Applied Activity Cost Pool Indoor Banners Outdoor Banners Order processing Print set-up Graphics design Quality control Total overhead cost Number of units produced Overhead cost per unit

b. Compute the unit product cost of each product. (Round your answers to 2 decimal places.)

Answer 1

Req 1.
Estimated Overheads			1920000
Divide: Estimated DLH			25600
(16000*1+ 3200*3)
OH rate per DLH			75
Req 1-b
			Indoor	Outdoor
Material cost per unit			14.5	32.6
Labour cost per unit			19	57
OH cost per unit			75	225
Unit cost			108.5	314.6
Req 2.
Activity rate:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Order processing			Order	480000	1600	300
print setup			batches	160,000	1,600	100
Artwork and Graphic			DLH	1,120,000	22,400	50
Quality control			Inspections	160,000	1,280	125
Req 3-a:
Activity		Rate	Indoor		Outdoor
			Activity	OH	Activity	OH
Order processing		300	800	240000	800	240000
print setup		100	1280	128000	320	32000
Artwork and Graphic		50	11200	560000	11200	560000
Quality control		125	640	80000	640	80000
		Total OH		1008000		912000
		Divide: Units		16000		3200
		OH cost per unit		63		285
Unit product cost
			Indoor	Outdoor
Material cost per unit			14.5	32.6
Labour cost per unit			19	57
OH cost per unit			63	285
Unit cost			96.5	374.6