Question

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $714,000 in overhead costs would be incurred and the company would produce and sell 2,000 units of the flexible model and 10,000 units of the rigid model. The flexible model requires 3.0 hour(s) of direct labor time per unit, and the rigid model requires 1.50 hour(s). Direct materials and labor costs per unit are given below:

  

	Flexible		Rigid
Direct materials cost per unit	$	125	$	80
Direct labor cost per unit	$	30	$	15

   

Required:
1-a.	Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b.	Compute the unit product cost for one unit of each model.
	Unit product cost Flexible Rigid

   

2.	An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

			Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost		Flexible	Rigid	Total
Purchase orders (number of orders)	$	22,500	100	350	450
Rework requests (number of requests)		12,500	75	175	250
Product testing (number of tests)		170,000	650	710	1,360
Machine related (machine-hours)		509,000	1,100	3,990	5,090
	$	714,000

     

Compute the activity rate for each of the activity cost pools.

Activity Cost Pool Activity Rate Purchase orders per order Rework requests per request Product testing per test Machine-related per MH

3.	Using activity-based costing, do the following:

a.	Determine the total amount of overhead that would be assigned to each model for the year.

    

	Total amount of overhead Flexible Rigid

b.		Compute the unit product cost for one unit of each model. (Do not round intermediate calculations and round your answers to 2 decimal places.)
	Unit product cost Flexible Rigid

Answer 1

1 a . In this method total overhead cost will be distributed using labor hours only.

Total overhead cost = 714000 $

Calculation of direct labor hours = Units * Labor hour per unit

1. Flexible = 2000 units * 3 hours per unit = 6000 Hours
2. Rigid = 10000 units * 1.5 hours per unit = 15000 hours

Total hours = 6000 + 15000 = 21000

Overhead rate = Overhead cost / total direct labor hours

= 714000 / 21000

= 34 $ per labor hours.

1 b

working note

overhead allocation = no of hours per unit * overhead rate(34$)

Flexible = 3 hours * 34 = 102$ per unit

Rigid = 1.5 hours * 34 = 51$ per unit

Calculation of unit product cost

Particulars	Flexible	Rigid
Direct material (Given)	125	80
Direct labor (Given)	30	15
Overhead allocation (working note)	102	51
Total cost per unit	257	146

2 In ABC method each overhead is allocated on the basis of a cost driver i. e. the no of times that activity performed.

Activity rate = Overhead cost / Total activity

Calculation of activity rates

Particulars	Overhead cost	Total activity	Activity rate
Purchase orders	22500	450	50 per order
Rework request	12500	250	50 per request
Product testing	170000	1360	125 per test
Machine related	509000	5090	100 per machine hour

3.

a)

Calculation of overhead amount assigned

Particulars	Activity rate	Flexible	Rigid
Purchase orders	50 per order	5000 (50* 100 orders)	17500 (50 * 350 orders)
Rework request	50 per request	3750 (50* 75 request)	8750 (50*175 requests)
Product testing	125 per test	81250 (125 * 650 tests)	88750 (125*710 tests)
Machine related	100 per machine hour	110000 (100* 1100 hours)	399000 (100 * 3990 hours)
TOTAL		200000	514000

b) Working note

Overhead cost per unit = Overhead cost allocated / No of units

  Flexible = 200000 / 2000 = 100 $ per unit

Rigid = 514000 / 10000 = 51.4 $ per unit

Calculation of unit product cost

Particulars	Flexible	Rigid
Direct material (Given)	125	80
Direct labor (Given)	30	15
Overhead allocation (working note)	100	51.4
Total cost per unit	255	146.4