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 $630,000 in overhead costs would be incurred and the company would produce and sell 2,500 units of the flexible model and 10,000 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 Rigid $130 $ 85 $ 35 $ 20 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:

Answer 1

1-a.	Predetermined overhead rate=estimated manufacturing overhead/estimated direct labor hours
	Estimated direct labor hours:
			Estimated production	labor time per unit	Labor hours
			a	b	a*b
	Flexible		2500	2.4	6000
	Rigid		10000	1.2	12000
	Total				18000
	Predetermined overhead rate=630000/18000=$ 35 per hour
1-b.	Unit product cost:
					Flexible	Rigid
	Direct materials cost per unit				130	85
	Direct labor cost per unit				35	20
	Overhead cost per unit				84	42
					(2.4*35)	(1.2*35)
	Total cost				249	147
2	Activity rate=Estimated overhead cost/Total expected activity
	Activity		Estimated overhead cost	Total expected activity	Activity rate
			a	b	a/b
	Purchase orders		23500	470	50
	Rework requests		13500	270	50
	Product testing		180000	1800	100
	Machine related		413000	4130	100
3-a.	Allocation of cost=Expected activity for the product*Activity rate
				Flexible			Rigid
	Activity			Expected activity for the product	Activity rate	Cost allocated	Expected activity for the product	Activity rate	Cost allocated
				a	b	a*b	c	d	c*d
	Purchase orders			110	50	5500	360	50	18000
	Rework requests			80	50	4000	190	50	9500
	Product testing			700	100	70000	1100	100	110000
	Machine related			1200	100	120000	2930	100	293000
	Total overhead		e			199500			430500
	Budgeted sales		f			2500			10000
	Overhead cost per unit		e/f			79.80			43.05
3-b.					Flexible	Rigid
	Direct materials cost per unit				130	85
	Direct labor cost per unit				35	20
	Overhead cost per unit				79.8	43.05
	Total cost				244.8	148.05