Question

Required information The following information applies to the questions displayed below.) For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours. Despite the growing popularity of the company's new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company's costing system. Direct material and direct labor costs per unit are as follows: Direct materials Direct labor (0.20 hours and 0.60 hours @ $15.00 pe LEC 40 $20.00 $ 3.00 LEC 90 $46.00 $ 9.00 hour) Management estimates that the company will incur $920,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold. 2. Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools: Activity Cont Pool Maintaining parts inventory Processing purchase orders Quality control Machine-related Activity Measure Number of part types Number of purchase orders Number of tests run Machine-hours Estimated Overhead Cost $ 258,000 80,000 32,000 550,000 $ 920,000 Activity Measure Number of part types Number of purchase orders Number of tests run Machine-hours Expected Activity LEC 40 LEC 90 Total 750 1,400 2,150 1,600 400 2,000 1.400 1.800 3,200 4,000 6,000 10,000 Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)

Answer 1

Activity Rate = Estimated Overheads/Estimated Activity
Cost Pool	Overhead Amount	Total Activity	Activity Rate
Maintaining Inventory	258000	2150	120	per part type
Processing Purchase Orders	80000	2000	40	per order
Quality Control	32000	3200	10	per test
Machine Related	550000	10000	55	per MH
Cost Assigned = Activity Rate*Activity Consumed
		LEC 40		LEC 90
Cost Pool	Activity Rate	Activity	Overhead Assigned	Activity	Overhead Assigned
Maintaining Inventory	120	750	90,000	1,400	168,000
Processing Purchase Orders	40	1,600	64,000	400	16,000
Quality Control	10	1,400	14,000	1,800	18,000
Machine Related	55	4,000	220,000	6,000	330,000
		Total	388,000		532,000
		Number of units	80,000		40,000
		Overhead cost per unit	4.85		13.3
Unit product Cost
	LEC 40	LEC 90
Direct Material	20	46
Direct Labor	3	9
Overhead	4.85	13.3
Unit product Cost	27.85	68.3