Rehm Company manufactures a product that is available in both a deluxe model and
ID: 2416840 • Letter: R
Question
Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured 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 increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.
Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $5,390,125 in manufacturing overhead cost and produce 24,000 units of the deluxe model and 112,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires .5 hours. Material and labor costs per unit are as follows:
Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)
Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools:
Expected Activity
Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools.(Omit the "$" sign in your response.)
Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. (Round your overhead per unit to 2 decimal places. Omit the "$" sign in your response.)
Compute the unit product cost of each model (materials, labor, and manufacturing overhead). (Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured 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 increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.
Explanation / Answer
1a) Pre-determined Overhead rate = $5390125 / [24000 + (112000 * 0.50) ] = $67.37
1b) Unit cost of each model =
Deluxe = $149 + 19 + 67.37 = $235.37
Regular = $119 + 7 + 33.69 = $159.69
The Pre-determined overhead rate for each of the four activity cost pools:
Purchase Orders = $264600 / 1080 = $245 per order
Scrap / Rework orders = $740025 / 1035 = $715 per rework order
Product testing = $955500 / 14700 = $65 per test
Machine related = $3430000 / 49000 = $70 per MH
3a) the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system:
3b) the unit product cost of each model (materials, labor, and manufacturing overhead) :
Pre- determined Activity rate $ Expected Activity Deluxe Applied Manufacturing overhead cost - Deluxe $ Expected Activity Regular Applied Manufacturing overhead cost - Regular $ Purchase Orders 245 360 88200 720 176400 Scrap / Rework orders 715 575 411125 460 328900 Product testing 65 5880 382200 8820 573300 Machine related 70 19600 1372000 29400 2058000 Total overhead $2253525 $3136600 Units produced 24000 112000 Overhead cost per unit $93.89 28.00