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 $741,000 in overhead costs would be incurred and the company would produce and sell 2,000 units of the flexible model and 9,000 units of the regular model. The flexible model requires 3.0 hours of direct labor time per unit, and the regular model requires 1.50 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit Direct labor cost per unit Flexible Rigid $100 $ 75 $ 50 $ 35 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. 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 Purchase orders (number of orders) Rework requests (number of requests) Product testing (number of tests) Machine related (machine-hours) Estimated Overhead Cost $ 26,500 16,500 300,000 398,000 $ 741,000 Flexible 140 55 650 1,100 Rigid 390 275 1,750 2,880 Total 530 330 2,400 3,980

Answer 1

Solution 1:

Direct labor hours estimated = 2000*3 + 9000*1.50 = 19500 hours

Predetermined overhead rate = $741000 / 19500 = $38 per DLH

Solution 2:

Computation of Unit Product Cost
	Flexible	Rigid
Direct Materials	$100.00	$75.00
Direct Labor	$50.00	$35.00
Overhead Cost per unit ($38*Labor hours per unit)	$114.00	$57.00
Unit product cost	$264.00	$167.00

Solution 3:

Computation of Activity rates
Activity cost pool	Overhead costs	Estimated activity	Activity Rate
Purchase orders	$26,500	530	$50.00	per order
Rework requests	$16,500	330	$50.00	per request
Product testing	$3,00,000	2400	$125.00	per test
Machine Related	$3,98,000	3980	$100.00	per MH

Solution 4:

Computation of Overhead allocated and Overhead per unit
		Flexible		Rigid
Activity cost pool	Activity Rate	Estimated Activity	Overhead Allocated	Estimated Activity	Overhead Allocated
Purcahse orders	$50.00	140	$7,000	390	$19,500
Rework requests	$50.00	55	$2,750	275	$13,750
Product testing	$125.00	650	$81,250	1750	$2,18,750
Machine Related	$100.00	1100	$1,10,000	2880	$2,88,000
Total Overhead allocated			$2,01,000		$5,40,000
No. of units			2000		9000
Overhead per unit			100.50		60.00

Solution 5:

Computation of Unit Product Cost
	Flexible	Rigid
Direct Materials	$100.00	$75.00
Direct Labor	$50.00	$35.00
Overhead Cost per unit	$100.50	$60.00
Unit product cost	$250.50	$170.00