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	$	59.00		$	47.00
Direct labor per unit	$	17.00		$	14.00
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	$	627,000
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)	$	462,000	7,000	70,000	77,000
Batch setups (setups)		105,000	200	100	300
Safety testing (tests)		60,000	30	70	100
Total manufacturing overhead cost	$	627,000

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

Answer 1

Answer 1) Unit Product Cost under traditional Costing method :

Manufacturing Overhead Cost per hour = 627000/77000 = $8.14 per hour

	Delux	Standard
Direct Material Cost	59	47
Direct Labour Cost	17	14
Manufacturing Overhead Cost	5.70	11.40
Total Cost	81.70	72.40

Answer 2)

Activity cost rate:

Activity	Total Cost	No. Of Activities	Per Activity Cost
Supporting Direct Labour Cost	462000	77000	$6
Batch setup cost	105000	300	$350
Safety testing cost	60000	100	$600
	627000

Activity Overhead Cost per product:

	Total cost of Delux	Cost per unit of Delux	Total cost of Standard	Cost per unit of Standard
Supporting direct labour cost	$42000 (6*7000)	4.20	$420000 (6*70000)	8.40
Batch setup cost	$70000 (350*200)	7	$35000 (350*100)	0.70
Safety testing cost	$18000 (600*30)	1.80	$42000 (600*70)	0.84

Cost as per Activity based costing :

	Delux	Standard
Direct Material Cost	59	47
Direct Labour Cost	17	14
Supporting Direct Labour Cost	4.20	8.40
Batch Setup Cost	7	0.70
Safety testing Cost	1.80	0.84
Total cost	$89	$70.94