Question

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring 3 hours of direct labor time per unit to manufacture compared to 2 hour of direct labor time for Product S. Product W is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $1,072,715 in manufacturing overhead costs and produce 15,000 units of Product W and 75,000 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product S			Product W
Direct material	$	18		$	30
Direct labor		11			15

Required:

a-1. Compute the predetermined overhead rate under the current method of allocation.

a-2. Determine the unit product cost of each product for the current year.

b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

			Total Activity
Activity Cost Pool	Total Cost		Product S	Product W	Total
Machine setups required	$	531,570	1,370	2,400	3,770
Purchase orders issued		53,703	508	155	663
Machine-hours required		301,280	7,960	10,870	18,830
Maintenance requests issued		186,162	711	922	1,633
	$	1,072,715

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

predetermined overhead rate?

Determine the unit product cost of each product for the current year. (Round your answers to 2 decimal places.)

S?

W?

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

S?

W?

Answer 1

Solution a-1:

Total Direct labor hours = 15000*3 + 75000*2 = 45000 + 150000 = 195000 hours

Predetermined overhead rate = Total overhead cost / Total direct labor hours = $1072715 / 195000 =  $5.50 per hour

Solution a-2:

Computation of Unit Product Cost
	Product S	Product W
Direct Materials	$18.00	$30.00
Direct Labor	$11.00	$15.00
Overhead cost per unit (Labor hour per unit*$5.50)	$11.00	$16.50
Unit product cost	$40.00	$61.50

Solution b:

Comptation of Activity rates
Activity cost pool	Overhead costs	Total Activity	Activity Rate
Machine setups required	$5,31,570	3770	$141.00
Purchase orders issued	$53,703	663	$81.00
Machine hours required	$3,01,280	18830	$16.00
Maintenance requests issued	$1,86,162	1633	$114.00
Total	$10,72,715

Computation of Overhead allocated per unit
		Product S		Product W
Activity cost pool	Activity Rate	Estimated Activity	Overhead Allocated	Estimated Activity	Overhead Allocated
Machine setups required	$141.00	1370	$1,93,170	2400	$3,38,400
Purchase orders issued	$81.00	508	$41,148	155	$12,555
Machine hours required	$16.00	7960	$1,27,360	10870	$1,73,920
Maintenance requests issued	$114.00	711	$81,054	922	$1,05,108
Total			$4,42,732		$6,29,983
No. of units			75000		15000
Overhead per unit			5.90		42.00

Computation of Unit Product Cost
	Product S	Product W
Direct Materials	$18.00	$30.00
Direct Labor	$11.00	$15.00
Overhead cost per unit	$5.90	$42.00
Unit product cost	$34.90	$87.00