Problem 8-29(appendix – 8B) Activity – based costing as an Alternative to Traditional product Costing[LOT]

Problem 8-29(appendix – 8B) Activity – based costing as an Alternative to Traditional product Costing[LOT]

Erie, Inc manufacturers two models of high-pressure steam valves. The XR7 model and the ZD5 model. Data regarding the two products follow

Product Direct labor hours Annual production Total Direct Labor Hours

XR7 0.2 DLHs per unit 25,000 units 5,000 DLHs

ZD5 0.4 DLHs per unit 46,000 units 16,400 DLHs

23,400 DLHs

Additional information about the company follows:

a. Product XR7 requires $37 in direct materials per unit, and product ZD5 requires $21.

b. The direct labor rate is $60 per hour

c. The company has always used direct labor hours as the b for applying manufacturing overhead cost to products manufacturing overhead totals $2,335,800 per year.

d. Product XR7 is more complex to manufacture that product ZD5 and requires the use of a special milling machine.

e. Because of the special work required in (d) above, the company is considering the use of activity based ting to apply overhead cost to products. Three activity cost pools have been determined and the first state allocations have been completed. Data concerning these activity cost pools appear below

Activity Cost Pool Activity measure Estimated Total Cost XR7 ZD5 Total

Machine setups Number of setups $148,000 120 80 200

Special milling Machine hours 267,000 1,030 0 1,030

General factory Direct labor-hours 1,920,000 4,800 19,200 24,000

$2,335,800

Requirement 1

Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products

(a) Compute the predetermined overhead rate (Round your answer to the nearest dollar amount. Omit the “$” sign in your responses)

Predetermined overhead rate $____________Per DLH

(b) Determine the unit product cost of each product (Omit the “$” sign in your response. Round your answers to 2 decimal places

Model

XR7 ZD5

Total unit product Cost  $_____________ $_________

 

Requirement 2:

Assume that the company decides to use activity-based costing to apply overhead cost to products.

(a) Compute the activity rate for each activity cost pool. Also compute the amount of overhead cost that would be applied to each product. (Leave no cells blank – be certain to enter “0” whenever required. Round the overhead cost per unit to 2 decimal places. Omit the “$” sign in your response.)

Activity cost pool Activity Rate

Machine setups $____________Per setup

Special milling $____________Per MH

General factory $____________Per DLH

Model XR7:

Activity cost Pool Overhead Applied

Machine setups $__________

Special milling ___________

General factory ___________

Total manufacturing overhead cost $__________

Overhead cost per unit $__________

ModelZD5

Activity Cost pool Overhead Applied

Machine setups $_______

Special milling _______

General factory _______

Total manufacturing overhead cost $______

Overhead cost per unit _______

(b) Determine then unit product cost of each product. (omit the”$ sing in your response. Round your answers to 2 decimal places.)

Unit product cost of Model XR7 $_____________________________

Unit product cost of Model ZD5 $___________________________

 

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