Merkel industries has a traditional costing system in which it applies manufactu
ID: 2571700 • Letter: M
Question
Merkel industries has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Large and Small, about which it has provided the following data:
Direct materials
per unit
Direct labor per
unit
Direct labor- hours
per unit
Annual
production
The company's estimated total manufacturing overhead for the year is $1,793,790 and the company's estimated total direct labor-hours for the year is 57,000.
The company is considering using a varition of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
Activities and Activity
Measures
Estimated Overhead
Cost
Supporting direct labor
(DLHs)
Parts administration (part
types)
Required:
a. Determine the unit product cost of each of the company's two products under the traditional costing system.
b. Determine the unit product cost of each of the company's two products under the activity-based costing system.
Large SmallDirect materials
per unit
$17.80 $55.40Direct labor per
unit
$16.10 $55.20Direct labor- hours
per unit
0.70 2.40Annual
production
30,000 15,000Explanation / Answer
a. Predetermined overhead rate under traditional costing = Estimated Total Manufacturing Overhead Cost / Estimated Total Direct Labor Hours = $ 1,793,790 / 57,000 = $ 31.47 per Direct Labor Hour.
Computation of unit product cost :
b. Computation of unit product cost under activity based costing :
Comuptation of manufacturing overhead per unit :
Large Small Direct Materials 17.80 55.40 Direct Labor 16.10 55.20 Manufacturing Overhead ( $ 31.47 x Direct Labor Hours) 22.03 75.53 Unit Product Cost $ 55.93 $ 186.13