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 $588,000 in overhead costs would be incurred and the company would produce and sell 2,500 units of the flexible model and 9,000 units of the regular model. The flexible model requires 2.4 hours of direct labor time per unit, and the regular model requires 1.20 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit Direct labor cost per unit Flexible $100 $ 40 Rigid $ 90 $ 25 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 $ 27,000 17,000 220,000 324,000 $588,000 Flexible 115 50 800 1,000 Rigid 560 290 960 3,320 Total 675 340 1,760 4,320

Answer 1

	Marine Inc.
	Flexible	Rigid	Total
Production=(A)	2500	9000
Hours required per unit=(B)	2.4	1.2
Total Hours=(A)*(B)	6000	10800	16800
1a)
Predetermined Overhead rate=Estimated Overhead/Budgeted base
Estimated Overhead=(A)	$                        5,88,000.00
Direct Labor Hours=(B)	16800
Predetermined Overhead Rate=(A)/(B)	$                                    35.00	Per Direct Labor Hour
1b)
Unit Product Cost
	Flexible Model	Rigid Model
Direct Material(given)	$                                 100.00	$                           90.00
Direct Labor(given)	$                                    40.00	$                           25.00
Manufacturing Overhead	$                                    84.00	$                           42.00
Total Unit Product Cost	$                                 224.00	$                         157.00
Manufacturing Overhead	(2.4*$35)	(1.2*$35)
		Expected Activity
Activity Cost Pool and Activity measure	Estimated Overhead cost	Flexible	Rigid	Total
Purchase(Number of orders)	$                           27,000.00	115	560	675
Rework Request(Number of requests)	$                           17,000.00	50	290	340
Product testing(Number of tests)	$                        2,20,000.00	800	960	1760
Machine related (Machine Hours)	$                        3,24,000.00	1000	3320	4320
Total	$                        5,88,000.00
Activity Rate for each of activity cost pools
Activity cost pool	Activity Rate
Purchase Orders=($27000/675)	$                                    40.00	Per order
Rework Requests=($17000/340)	$                                    50.00	Per requests
Product Testing=($220000/1760)	$                                 125.00	Per test
Machine Related=($324000/4320)	$                                    75.00	Per machine hours
3a)
Overhead cost assigned to each model on the basis of activity based costing
	Flexible Model	Rigid Model
Purchase	$                              4,600.00	$                   22,400.00
Rework requests	$                              2,500.00	$                   14,500.00
Product Testing	$                        1,00,000.00	$               1,20,000.00
Machine Related	$                           75,000.00	$               2,49,000.00
Total amount of Overhead	$                        1,82,100.00	$               4,05,900.00
Overhead cost per unit=(Total Overhead /Number of units produced)=($182100/2500),($405900/9000)	$                                    72.84	$                           45.10
	Flexible Model	Rigid Model
Purchase	(115*$40)	(560*$40)
Rework requests	(50*$50)	(290*$50)
Product Testing	(800*$125)	(960*$125)
Machine Related	(1000*$75)	(3320*$75)
3b)
Unit Product Cost
	Flexible Model	Rigid Model
Direct Material	$                                 100.00	$                           90.00
Direct Labor	$                                    40.00	$                           25.00
Manufacturing Overhead	$                                    72.84	$                           45.10
Total Unit Product Cost	$                                 212.84	$                         160.10