Question

Ellix Company manufactures two models of ultra-high fidelity speakers—the X200 model and the X99 model. Data regarding the two products follow:

Product	Direct Labor-Hours	Annual Production	Total Direct Labor-Hours
X200	0.4 DLHs per unit	19,000 units	7,600 DLHs
X99	0.6 DLHs per unit	48,000 units	28,800 DLHs
			36,400 DLHs

Additional information about the company follows:

a. Model X200 requires $44 in direct materials per unit, and model X99 requires $20.

b. The direct labor workers are paid $40 per hour.

c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.

d. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.

e. Because of the special work required in (d) above, the company is considering the use of activity-based absorption costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

				Estimated Total Activity
Activity Cost Pool	Activity Measure	Estimated Total Cost		X200	X99	Total
Machine setups	Number of setups	$	179,400	104	156	260
Special processing	Machine-hours		326,400	1,020	0	1,020
General factory	Direct labor-hours		1,092,000	7,600	28,800	36,400
		$	1,597,800

Required:

1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

a. Compute the plantwide predetermined overhead rate.

b. Compute the unit product cost of each model.

2. Assume that the company decides to use activity-based absorption costing to apply overhead cost to products.

a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based approach.

b. Compute the unit product cost of each model.

Answer 1

1. Abosorption Costing:

A. Plantwide predetermined overhead rate = Total Overhead/Total Direct Labor Hours

= $ 1597,000/36400 = $ 43.87

B. Unit product cost:

	X200 ($)	X99 ($)
Direct material (given)	44	20
Direct Labor	40×0.4 = 16	40×0.6 = 24
Overhead	43.87×0.4 = 17.55	43.87×0.6 = 26.32
Total	77.55	70.32

2. Activity Based Costing:

a.

Cost per activity pool

	Amount ($)
Machine set ups	179400/260 = 690 per set up
Special processing	326400/1020 = 320 per machine hour
General factory	1092000/36400 = 30 per DLH

Overhead that would be applied for each model: (computed in b below)

• X200: 32.96 per unit
• X99: 20.24 per unit

b. Computation of unit product cost

	X200 ($)	X99($)
Activity costs:
Set ups	104×690 = 71760	156×690 = 107640
Special order	1020×320 = 326400	0
General overhead	7600×30 = 228000	28800×30 =864000
Total Overhead	626,160	971,640
Total units (given)	19000	48000
Overhead cost per Unit (A)	32.96	20.24
Direct Material (B)	44	20
Direct Labor (C)	16	24
Total unit cost (A+B+C)	92.96	64.24