Sandstorm Manufacturing Inc. makes two types of industrial component parts%u2014

Question

Sandstorm Manufacturing Inc. makes two types of industrial component parts%u2014the LE100 and the UL600. It annually produces 120,000 units of LE100 and 25,000 units of UL600. The company%u2019s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company%u2019s two product lines is shown below:

  

  

The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below:

  

  

  

  

  

LE100 UL600 Total   Direct materials $ 720,000     $ 357,000    $ 1,077,000      Direct labor $ 240,000     $ 100,000    $ 340,000   

Explanation / Answer

ANSWER LE100: TOTAL OF 3 = $6 + $2 + $6 = $14/unit

ANSWER UL600: TOTAL OF 3 = $14.28 + $4 + $12 = $30.28/unit

Product Cost = Direct Material(DM) + Direct Labor (DL) + Manufacturing Overhead (MOH)

LE100 DM cost/unit = $720,000 / 120,000 units = $6/unit

LE100 DL cost/unit = $240,000 / 120,000 units = $2/unit

LE100 MOH cost/unit = Predetermined Overhead Rate (calculated in 1a) * DL$ = $3.00/DL$ * $240,000 = $720,000 / 120,000 units = $6 / unit

TOTAL OF 3 = $6 + $2 + $6 = $14

UL600 DM cost/unit = $357,000 / 25,000 units = $14.28/unit

UL600 DL cost/unit = $100,000 / 25,000 units = $4/unit

UL600 MOH cost/unit = Predetermined Overhead Rate (calculated in 1a) * DL$ = $3.00/DL$ * $100,000 = $300,000 / 25,000 units = $12/unit

TOTAL OF 3 = $14.28 + $4 + $12 = $30.28

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