Question

Stillicum Corporation makes ultra light-weight backpacking tents. Data concerning the company’s two product lines appear below:

	Deluxe			Standard
Direct materials per unit	$	52.00		$	40.00
Direct labor per unit	$	10.00		$	8.40
Direct labor-hours per unit		0.70	DLHs		1.40	DLHs
Estimated annual production		10,000	units		50,000	units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$	522,000
Estimated total direct labor-hours		77,000	DLHs

Required:

1. Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools:  

			Expected Activity
Activity Cost Pools and Activity Measures	Estimated Overhead Cost		Deluxe	Standard	Total
Supporting direct labor (direct labor-hours)	$	385,000	7,000	70,000	77,000
Batch setups (setups)		84,000	200	100	300
Safety testing (tests)		53,000	30	70	100
Total manufacturing overhead cost	$	522,000

Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.

Answer 1

Req 1: Pre-determined overhead rate based on labour hours
Pre-determined rate= estimated overheads / Estimated labouor hours
		($522000 /77000 dlh) = $6.78 per DLH
STATEMENT SHOWING UNIT PRODUCT COST
				DELUXE	STANDARD
Direct Material per unit				52	40
Direct labour per unit				10	8.4
Overheads per unit
Deluxe (0.70 DLH @$6.78)				4.75
Standard (1.40 DLH @$6.78)					9.5
Unit product cost				66.75	57.9
Req 2:
Activity rate:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Supportin direct labour			DLH	385,000	77,000	$5 per DLH
batch setup			Setups	84,000	300	$280 per Setup
Safety testing			Tests	53,000	100	$530 per test
Activity cost assigned to products
				DELUXE	STANDARD
Supporting direct labour (@$5 per DLH)				35000	350000
batch Setup(@$280 per setup)				56000	28000
Safety Testing (@$530 per test)				15900	37100
Total Activity cost				106900	415100
Number of units				10000	50000
Activity cost per unit				10.69	8.302
STATEMENT SHOWING UNIT PRODUCT COST
				DELUXE	STANDARD
Direct Material per unit				52	40
Direct labour per unit				10	8.4
Activity cost per unit				10.69	8.302
Unit product cost				72.69	56.702