Question

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 70,000 units of EX300 and 13,500 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

	EX300			TX500			Total
Direct materials	$	376,325		$	172,550		$	548,875
Direct labor	$	130,000		$	47,500		$	177,500

The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below:

				Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead			EX300			TX500			Total
Machining (machine-hours)	$	175,875			100,000			67,500			167,500
Setups (setup hours)		262,500			125			400			525
Product-level (number of products)		202,400			1			1			2
General factory (direct labor dollars)		86,975		$	130,000		$	47,500		$	177,500
Total manufacturing overhead cost	$	727,750

Required:

1-a. Compute the plantwide overhead rate that would be used in the company’s conventional cost system.

1-b. Using the plantwide rate, compute the unit product cost for each product.

2-a. Compute the activity rate for each activity cost pool.

2-b. Using the activity rates, compute the unit product cost for each product.

Answer 1

1.a	Plantwide Overhead Rate =Total Manufacturing Overhead Cost / Total Direct labor Cost
	Plantwide Overhead Rate =$727,750 / $177,500 =$4.10 per direct labor
		EX300	TX500
1.b	No. of unit produced	70000	13500
	DM cost per unit	$                                             5.38	$                                  12.78
	DL cost per unit	$                                             1.86	$                                    3.52
	Overhead cost per unit	$                                             7.61	$                                  14.43
	Unit Product Cost	$                                           14.85	$                                  30.73
2.a		EX300	TX500	Total
	Machine Hours	100000	67500	167500	Machine hrs
	Machine Setups hours	125	400	525	setups hours
	No. of products	1	1	2	products
	Direct labor dollars	$                                      1,30,000	$                                47,500	$                        1,77,500	gen factory
2.b	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Machining	$                                      1,75,875	1,67,500	$                               1.05	per machine hrs
	Machine Setups	$                                      2,62,500	525	$                           500.00	per setup
	Product level	$                                      2,02,400	2	$                   1,01,200.00	per product
	General factory	$                                         86,975	1,77,500	$                               0.49	per direct labor dollars
		EX300	TX500
	Machining	$                                 1,05,000.00	$                           70,875.00
	Machine Setups	$                                    62,500.00	$                        2,00,000.00
	Product level	$                                 1,01,200.00	$                        1,01,200.00
	General factory	$                                    63,700.00	$                           23,275.00
	Total Overhead Cost	$                                 3,32,400.00	$                        3,95,350.00
	No. of units produced	70000	13500
	Overhead Cost per unit	$                                             4.75	$                                  29.29
		Product C	Product D
	DM cost per unit	$                                             5.38	$                                  12.78
	DL cost per unit	$                                             1.86	$                                    3.52
	Overhead cost per unit	$                                             4.75	$                                  29.29
	Unit Product Cost	$                                           11.98	$                                  45.59