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 $1,018,066 in manufacturing overhead costs and produce 10,800 units of Product W and 54,000 units of Product S during the current year. Unit cost for materials and direct labor are:

	Product S			Product W
Direct material	$	12		$	33
Direct labor		9			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	$	440,860	1,560	1,730	3,290
Purchase orders issued		53,430	569	116	685
Machine-hours required		203,610	7,310	11,200	18,510
Maintenance requests issued		320,166	749	945	1,694
	$	1,018,066

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

Answer 1

a1) Overhead rate = Estimated overhead/estimated labor hour = 1018066/140400 = 7.25 per hour

a2) Unit product cost

	Product W	Product S
Direct material	12	33
Direct labor	9	15
Overhead	21.75	14.50
Unit product cost	42.75	62.50

b) Calculate Unit product cost under activity based costing

	Product W	Product S
Machine setup	209040	231820
Purchase orders issued	44382	9048
Machine hour	80410	123200
Maintenance request issued	141561	178605
Total Overhead	475393	542673
Unit	10800	54000
Overhead cost per unit	44.02	10.05
Direct material	12	33
Direct labor	9	15
Unit product cost	65.02	58.05