Question

Coronado Manufacturing produces two products in its Saratoga plant, balzene and galvene. Since it opened its doors in 1965, Coronado has been using a single manufacturing overhead pool to accumulate overhead costs. Overhead has been allocated to products based on direct labor hours.

Until recently, Coronado was the sole producer of galvene in the country and was therefore able to dictate the selling price. However, last year Marcella Products began marketing a comparable product at $56 per unit—a price that is below Coronado’s product cost. Coronado’s market share of galvene has declined rapidly as a result. The company’s managers must now decide whether to meet the competitive price or discontinue the product. Coronado’s cost accountant has suggested that the company do an activity-based cost analysis before managers make the decision.

The two main indirect costs of manufacturing balzene and galvene are power usage and setup costs. Most of the power usage occurs in the fabricating department; most of the setup costs are incurred in the assembly department. Setup costs are incurred predominantly in the production of balzene. The fabricating department has identified machine hours as the appropriate cost driver; the assembly department has identified setups as the appropriate cost driver. Direct labor rates are the same in both departments.

The combined budget for manufacturing is as follows.

		Total		Balzene		Galvene
Number of units				10,000		10,000
Direct labor		$1,080,000		1 hours per unit		2 hours per unit
Direct material				$12.00 per unit		$2 per unit
Overhead
Indirect labor		$50,000
Fringe benefits		18,000
Indirect materials		31,000
Power		180,000
Setup		90,000
Quality assurance		25,000
Other utilities		20,000
Depreciation		30,000

The cost accountant has prepared the following estimates of overhead usage by the two departments:

		Fabricating			Assembly
Indirect labor		75%			25%
Fringe benefits		70%			30%
Indirect materials		$20,000			$11,000
Power		$100,650			$79,350
Setup		$20,000			$70,000
Quality assurance		65%			35%
Other utilities		60%			40%
Depreciation		80%			20%

Activity Base Usage		Machine Hours		Setups
Balzene		4 MH/unit		1,000
Galvene		6 MH/unit		250

(a)

Calculate the unit costs of balzene and galvene using the current overhead allocation basis of direct labor hours. (Round overhead rate and final answers to 2 decimal places, e.g. 15.25.)

		Balzene	Galvene
Cost per unit		$enter a dollar amount rounded to 2 decimal places	$enter a dollar amount rounded to 2 decimal places

Answer 1

	Balzene	Galvene
Cost per unit	62.80	103.60

Workings:
Indirect labor	50000
Fringe benefits	18000
Indirect materials	31000
Power	180000
Setup	90000
Quality assurance	25000
Other utilities	20000
Depreciation	30000
Total overhead	444000
Total overhead	444000
Divide by Total Direct labor hours	30000	=(10000*1)+(10000*2)
Overhead rate	14.80
Direct labor rate	36	=1080000/30000
	Balzene	Galvene
Direct material	12.00	2.00
Direct labor:
1 X 36	36.00
2 X 36		72.00
Overhead:
1 X 14.80	14.80
2 X 14.80		29.60
Total	62.80	103.60