Question

Required information

Upriver Parts manufactures two products, V-1 and V-2, at its River Plant. Selected data for an average month for the two products follow.

	V-1			V-2
Units produced		10,000			1,000
Direct materials cost per unit	$	2		$	4
Machine hours per unit		1			2
Production runs per month		80			40

Production at the plant is automated and any labor cost is included in overhead. Data on manufacturing overhead at the plant follow.

Machine depreciation	$	72,000
Setup labor		32,400
Material handling		17,280
Total	$	121,680

Required:

a. Compute the unit costs for the two products V-1 and V-2 using the current costing system at Upriver (using machine hours as the allocation basis). (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Compute the unit costs for the two products V-1 and V-2 using the proposed ABC system at Upriver. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

SOLUTION

A. Predetermined overhead rate per hour for the month = Total budgeted manufacturing overhead/ Budgeted machine hours

= $121,680 / 12,000 hours = $10.14 per machine hour

Budgeted machine hours = (10,000 units * 1 hour per unit) + (1,000 hours * 2 hours per unit)

= 12,000 hours

b.

Cost to be allocated	Estimated cost (a)	Estimated cost driver (b)	Activity rate (c=a/b)
Machine depreciation	72,000	12,000 hours	$6 per machine hours
Setup labor	32,400	(80+40) 120 production runs	$270 per production run
Material handling	17,280	[(10,000*2)+(1,000*4)] = 24,000 direct material costs	72% of direct material cost
Total	121,680