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	$	64.50		$	50.70
Direct labor cost per unit	$	17.90		$	12.70
Direct labor-hours per unit		1.4	DLHs		1	DLHs
Estimated annual production and sales		22,000	units		72,000	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	$2,025,160
Estimated total direct labor-hours	102,800	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)	$	729,880			30,800			72,000		102,800
Batch setups (setups)		573,500			235			135		370
Product sustaining (number of products)		655,040			1			1		2
General factory (machine-hours)		66,740			2,200			7,200		9,400
Total manufacturing overhead cost	$	2,025,160

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

1-a) Predetermined OH rate = Total Manufacturing Overhead/Total direct labor hours

= $2,025,160/102,800 DLHs

= $19.70 per labor hour

1-b) Calculation of unit product cost (Amounts in $)

Particulars	Xactive	Pathbreaker
Direct labor hours per unit (A)	1.4 DLHs	1 DLHs
Predetermined Overhead Rate (B)	19.70	19.70
Manufacturing Overhead per unit (C = A*B)	27.58	19.70
Direct materials per unit (D)	64.50	50.70
Direct labor cost per unit (E)	17.90	12.70
Unit Product Cost (C+D+E)	109.98	83.10

2) Calculation of Activity Rate (Amounts in $)

Activity Cost Pools and Activity Measures	Estimated Overhead Cost (E)	Total Expected Activity (F)	Activity Rate (E/F)
Supporting direct labor (direct labor-hours)	729,880	102,800	7.10 per DLH
Batch setups (setups)	573,500	370	1,550 per setup
Product sustaining (number of products)	655,040	2	327,520 per product
General Factory	66,740	9,400	7.10 per MH

3) Allocation of manufacturing Overhead cost (Amounts in $)

Activity Cost Pools	Xactive	Pathbreaker
1) Supporting direct labor	(30,800*7.10 per DLH) = 218,680	(72,000*7.10 per DLH) = 511,200
2) Batch setups	(235*1,550 setups) = 364,250	(135*1,550 setups) = 209,250
3) Product sustaining	(1*327,520) = 327,520	(1*327,520) = 327,520
4) General factory	(2,200*7.10 per MH) = 15,620	(7,200*7.10 per MH) = 51,120
Total Manufacturing Overhead (a)	926,070	1,099,090
Units produced (b)	22,000 units	72,000 units
Manufacturing OH cost per unit (a/b)	42.09 per unit	15.27 per unit

Calculation of Unit product cost (Amounts in $)

​Particulars	Xactive	Pathbreaker
Manufacturing Overhead per unit (a)	42.09	15.27
Direct materials per unit (b)	64.50	50.70
Direct labor cost per unit (c)	17.90	12.70
Unit Product Cost (a+b+c)	124.49	78.67