Flyer Corporation manufactures two products, Product A and Product B. Product B

Question

Flyer Corporation manufactures two products, Product A and Product B. Product B is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product A. Product B is the more complex of the two products, requiring three hours of direct labor time per unit to manufacture compared to one and one-half hours of direct labor time for Product A. Product B is produced on an automated production line.

Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $396,000 in manufacturing overhead costs and produce 5,500 units of Product B and 22,000 units of Product A during the current year. Unit costs for materials and direct labor are:

Required:

a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.

b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

                                                                                Total Activity

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

Product A Product B Direct material $9 $20 Direct labor $7 $15

Explanation / Answer

(a)

Hours required by A = 3 x 5,500 = 16,500

Hours required by B = 1.5 x 22,000 = 33,000

Ratio of labor hours required by A and B = 16,500 : 33,000 = 1 : 2

So,

Predetermined overhead rate, A = $396,000 / 16,500 = $24 per hour

Predetermined overhead rate, B = $396,000 / 33,000 = $12 per hour

(b)

Working notes:

1. Proportion of machine setup cost allocated to A = 700 / 1,700 = 41.18%

2. Proportion of machine setup cost allocated to B = 1,000 / 1,700 = 58.82%

3. Proportion of purchase order cost allocated to A = 300 / 500 = 60%

4. Proportion of purchase order cost allocated to B = 200 / 500 = 40%

5. Proportion of maintenance request cost allocated to A = 400 / 1,000 = 40%

6. Proportion of maintenance request setup cost allocated to B = 600 / 1,000 = 60%

7. Proportion of machine hour cost allocated to A = 4,000 / 13,000 = 30.77%

8. Proportion of machine hour cost allocated to B = 9,000 / 13,000 = 69.23%

So:

Cost Total Cost ($) % Allocated to A % Allocated to B Cost allocated to A ($) Cost allocated to B ($) Machine Setup 1,70,000 41.18 58.82 70,000 1,00,000 Purchase order 37,000 60 40 22,200 14,800 Machine hour 91,000 30.77 69.23 28,000 63,000 Maintenance request 98,000 40 60 39,200 58,800 TOTAL 3,96,000 1,59,400 2,36,600

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---