Question

Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $5,162,500 in overhead costs would be incurred and the company would produce and sell 12,500 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 3.0 hours of direct labor time per unit, and the regular model requires 1.0 hour. Materials and labor costs per unit are given below:

  

	Deluxe			Regular
Direct materials cost per unit	$	60.00		$	40.00
Direct labor cost per unit	$	40.00		$	20.00

   

Required:
1-a.	Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b.	Compute the unit product cost for one unit of each model.

   

2.	An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

			Expected Activity
Activity Cost Pool and Activity Measure		Estimated Overhead Cost	Deluxe	Regular	Total
Purchase orders (number of orders)	$	85,000	600	1,100	1,700
Rework requests (number of requests)		355,000	900	1,940	2,840
Product testing (number of tests)		315,000	6,400	4,100	10,500
Machine related (machine-hours)		4,407,500	6,500	15,000	21,500
	$	5,162,500

     

Compute the activity rate for each of the activity cost pools.

3.	Assume that actual activity is as expected for the year. Using activity-based costing, do the following:

   

a.	Determine the total amount of overhead that would be applied to each model for the year.

    

b.	Compute the unit product cost for one unit of each model. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

Solution 1a:

Estimated direct labor hours = 12500*3 + 50000*1 = 87500 hours

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours

= $5,162,500 / 87500 = $59 per direct labor hour

Solution 1b:

Computation of unit product cost for each model - Weston Corporation
Particulars	Deluxe	Regular
Direct material cost per unit	$60.00	$40.00
Direct labor cost per unit	$40.00	$20.00
Manufacturing overhead	$177.00	$59.00
Unit product cost	$277.00	$119.00

Solution 2:

Determination of Activity Rate - Activity Based Costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Purchase Orders	$85,000.00	Nos of orders	1700	$50.00
Rework Requests	$355,000.00	Nos of requests	2840	$125.00
Product Testing	$315,000.00	Nos of tests	10500	$30.00
Machine related	$4,407,500.00	Machine hours	21500	$205.00

Solution 3a:

Determination of allocation of overheads to product lines and overheaed cost per unit- Activity based costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Deluxe		Regular
					Usage	Allocated Costs	Usage	Allocated Costs
Purchase Orders	$85,000.00	Nos of orders	1700	$50.00	600	$30,000.00	1100	$55,000.00
Rework Requests	$355,000.00	Nos of requests	2840	$125.00	900	$112,500.00	1940	$242,500.00
Product Testing	$315,000.00	Nos of tests	10500	$30.00	6400	$192,000.00	4100	$123,000.00
Machine related	$4,407,500.00	Machine hours	21500	$205.00	6500	$1,332,500.00	15000	$3,075,000.00
Total	$5,162,500.00					$1,667,000.00		$3,495,500.00
Nos of units						12500		50000
Overhead cost per unit						$133.36		$69.91

Solution 3b:

Computation of unit product cost for each model - Weston Corporation - Activity Based Costing
Particulars	Deluxe	Regular
Direct material cost per unit	$60.00	$40.00
Direct labor cost per unit	$40.00	$20.00
Manufacturing overhead	$133.36	$69.91
Unit product cost	$233.36	$129.91