Question

Short Round Inc manufactures two types of hats, fedoras and baseball caps. Fedoras require 2 hours of direct labor per unit to manufacture fedoras compared to 1 hour of direct labor per unit to produce baseball caps. Overhead is currently allocated to the two products on the basis of direct labor hours. Short Round estimated it would incur $510,000 in manufacturing overhead costs, and produce 10,000 units of fedoras and 40,000 units of baseball caps during the current year.

Unit costs for direct materials and direct labor are as follows:

	Baseball Caps	Fedoras
Direct materials per unit	$11	$24
Direct labor per unit	$6	$12

1. What is the unit product cost of each product under the current overhead allocation method?

2. Short Round is considering the use of activity-based costing as an alternative to its current overhead allocation method. Data relating to the company’s activity cost pools for the current year are given below:

		Expected Activity Levels
	Estimated OH costs	Baseball Caps	Fedoras	Total
Machine setups	$204,000	800	1,600	2,400
Purchase orders	$43,500	500	100	600
Machine-hours	$105,000	7,000	10,500	17,500
Maintenance requests	$157,500	650	850	1,500

Using the data above, what is the revised unit product cost of each product under the activity-based costing system?

3. Compare your answers to parts a and b. What overhead activities seem to contribute to the differences you observe?

Answer 1

Part 1:

	Baseball Cap	Fedoras
Material Cost	11.00	24.00
Labour Cost	6.00	12.00
Overhead Allocated (Note)	8.50	17.00
		(8.50*2 Hour)
	25.50	53.00

Working Note:

Particulars	$	Working
Total Overhead	510,000
Total Hours
Fedoras	20,000	= 10000*2
Baseball Cap	40,000	= 40000*1
	60,000
OH per Hours	8.50

Part 2:

	Baseball Cap	Fedoras
Material Cost	11.00	24.00
Labour Cost	6.00	12.00
Overhead Allocated (Note)	5.3625	29.5500
	22.3625	65.5500

Working Note:

Total Overhead	$	Baseball Cap	Fedoras	Total	Per OH Activity	OH - Baseball Cap	OH - Fedoras
Machine setup	204,000	800	1,600	2,400	85	68,000	136,000
Purchase Orders	43,500	500	100	600	73	36,250	7,250
Machine Hours	105,000	7,000	10,500	17,500	6	42,000	63,000
Machine Requests	157,500	650	850	1,500	105	68,250	89,250
Total OH						214,500	295,500
No. of Units						40,000	10,000
OH per unit						5.3625	29.5500