P8-29(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
|
$___________________________
|
Solution preview
Problem
8-29 (Appendix 8B) Activity-Based costing as an Alternative to Traditional
product costing
1. a. When direct labor-hours are used to apply
overhead cost to products, the company’s predetermined overhead rate would be:
Predetermined overhead rate = Manufacturing overhead cost
Direct
Labor hours
=
$1,480,000
20,000 DLHs
