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 $518,000 in overhead costs would be incurred and the company would produce and sell 2,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.00 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit Direct labor cost per unit Flexible $ 120 $ 35 Rigid $ 95 $ 25 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

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1.a Predetermined Overhead Rate Estimated Manufacturing Overhead Estimated Direct Labor hour Predetermined rate $ $ Divide 518,000 14,000 (2000 x 2) + (10000 x 1) 37.00 Per DLH 1.b Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost Cost per unit Flexible 120.00 $ 35.00 $ 37.00 $ 192.00$ Rigid 95.00 25.00 37.00 157.00 $ 2 Calculate Activity Rate Expected use of cost driver Activity based overhead rate Activity cost pool Estimated Overhead Purchase Order Rework Request Product Testing Machine Related 30,500 20,500 200,000 267,000 518,000 610 Orders 410 Requests 1600 Tests 2670 Machine hour 50 Per Order 50 Per Request 125 Per Test 100 Per Machine hour 3.a Activity cost pool Purchase Order Rework Request Product Testing Machine Related Flexible Activity based Expected Cost driver overhead rate Cost Assigned 125 $ 50.00 $ 6,250 75 $ 50.00 $ 3,750 700 $ 125.00$ 87,500 1500 $ 100.00 $ 150,000 Expected Cost driver $ 485 $ 335 $ 900 $ 1,170 $ $ $ $ Rigid Activity based overhead rate Cost Assigned 50.00 $ 24,250 50.00 $ 16,750 125.00 $ 112,500 100.00 $ 117,000 $ $ Total Overhead Assigned Total Units Cost per unit 247,500 2000 123.75 270,500 10000 27.05 $ 3.b Direct Material Direct Labor Overhead cost Cost per unit $ $ $ $ Flexible 120.00 $ 35.00 $ 123.75 $ 278.75 $ Rigid 95.00 25.00 27.05 147.05