Question

Perkins Company manufacturers a wide variety of products in its Dallas Division. The Dallas plant was created to be an efficient producerof standardized products made in long-production runs although both high and low volume products are now producted there . Annual volums range from severl thousand units for some products to fewer than 10 for others. In recent year, much of the Dallas plants usual business in high volume products ha been lost to competitiors who price aggressivley and who do not product a full product line. To better understand the costs of its products, the Dallas Division is considering changing its product costing system. The existing sstem accululates al over head in a signle cost pool and allocates it based on direct labor horus. Because of the very large number of products, the general manger has decided to focus initially on just two products: Product 321, which is representative of most of Dallas- high volume products and Product 333, a representative low volume product. The following information pertains to the most recent years operations of the Dalls plant; for brevity, details for products other than Product 321 and Product 333 are not shown, but totals for the entire divison are given in the las t column.

................................................................Total for Product 321.....Total Product 333........Total for Dallas

Direct material cost......................................$6,000.....................$150........................25,000

Direct labor cost.......................................30,000.....................600..........................100,000

Total direct cost..................................$36,000........................750............................125,000

Unit-lever overhead....................................................................................................140,000

Batch level overhead....................................................................................................240,000

Product-level overhead................................................................................................200,000

Plant-level overhead....................................................................................................220,000

Total overhead.............................................................................................................800,000

................................................................Total for Product 321.....Total Product 333........Total for Dallas

Units produced........................................2400...............................6............................6,000

Direct Materials pounds..........................36,000............................200...........................100,000

Material requisitions............................40.........................................5............................1,0000

Direct labor hours............................7,200...................................120............................20,000

machine hours........................3,800........................................30...................................10,000

setups...................................40...............................................4....................................1,600

Setup hours............................400..........................................36.....................................8,000

Design changes............................1..........................................4......................................40

Deisgn hours...................................320....................................200...................................2,000

Usual selling price...........................$150.....................................1500

Competitors price.............................$100....................................--------

Question:

Using the existing costing system, calculate the total and unit product costs of the two products.

Answer 1

Under the existing costing system, the overheads are allocated to the products on the basis of direct labor hours. Therefore, we need to calculate the predetermined overhead rate as below:

Predetermined Overhead Rate = Total Overheads/Total Direct Labor Hours = 800,000/20,000 = $40 per direct labor hour

Now, we can calculate the total and unit product costs of the two products as follows:

	Product 321		Product 333
	Total	Unit	Total	Unit
Direct Material	6,000	2.5 (6,000/2,400)	150	25 (150/6)
Direct Labor	30,000	12.5 (30,000/2,400)	600	100 (600/6)
Overheads	288,000 (7,200*40)	120 (288,000/2,400)	4,800 (120*40)	800 (4,800/6)
Total	$324,000	$135	$5,550	$925

_____

	Total Product Cost	Total Unit Cost
Product 321	$324,000	$135
Product 333	$5,550	$925