Question

Contrasting ABC and Conventional Product Costs

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker, Data concerning these two product lines appear below:

	Xactive	Pathbreaker
Direct materials per unit	$64.80	$51.00
Direct labor costs per unit	$18.20	$13.00
Direct labor -hours per unit	1.4 DLHs	1.0 DLHs
Estimated annual production and sales	25,000 units	75,000 units

The company has a conventional 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_____________$2,200,000

Required:

1.Compute the predetermined overhead rate based on direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product.

2.The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools

                                                                                                                    Expected activity_____

                                                                        Estimated          

Activities and activity Measures        Overhead Cost       Xactive     Pathbreaker       Total

Supporting direct labor (direct              $797,500               36,000         75,000          110,000

                               Labor -hours)

Batch setups(setups)                                 680,000                    250              150                  400

Product sustaining (number of

                                    Products)                 650,000                         1                    1                     2

General Factory (machine-hours)              72,000                 2,500           7,500            10,000

Total Manufacturing overhead

                                               Cost             $2,200,000

Answer 1

1) Predetermined Overhead Rate ;-

= Estimated total manufacturing Overhead cost / Estimated total direct labor hours

= $2200000 / 110000 h

= $20 per hour

Estimated Total Direct Labor Hours :-

= (25000 units * 1.4 h per unit) + (75000 units * 1 h per unit)

= 35000 h + 75000 h

= 110000 hours

2) Total Manufacturing Overhead Cost :-

Activities and Activity Measures	Cost Driver	Estimated Overhead Cost ($)	Expected Activity	Acticity Rate
Supporting direct labor (Direct Labor Hours)	Direct Labor Hours	797500	110000	$7.25 per Labor Hour
Batch Setup	Set ups	680000	400	$1700 Per Set Up
Product Sustaining	No. of Products	650000	2	$325000 Per Product
General Factory	Machine hours	72500	10000	$7.25 Per Machine Hour