Puget World, Inc., manufactures two models of television sets, the N 800 XL mode

Question

Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Direct Labor- Hours per Unit Annual Production Total Direct Labor-Hours Model N 800 XL 1.8 4,800 units 8,640 Model N 500 0.9 28,000 units 25,200 33,840 Additional information about the company follows: a. Model N 800 XL requires $71 in direct materials per unit, and Model N 500 requires $52. b. The direct labor wage rate is $11 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Activity Cost Pool Activity Measure Estimated Overhead Cost Machine setups Number of setups $ 356,000 Special processing Machine-hours 176,000 General factory Direct labor-hours 1,268,000 $ 1,800,000 Expected Activity Activity Measure Model N 800 XL Model N 500 Total Number of setups 50 100 150 Machine-hours 12,000 0 12,000 Direct labor-hours 8,640 25,200 33,840 2-16-2011 1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.(Do not round intermediate calculations.Round your answers to 2 decimal places.) a. Compute the predetermined overhead rate. Predetermined overhead rate $ per DLH b. Compute the unit product cost of each model. Model N 800 XL $ Model N 500 $ 2. Assume that the company decides to use activity-based costing to assign manufacturing overhead cost to products. a(1) Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) Machine setup $ per setup Special processing $ per MH General factory $ per DLH a(2) Determine the amount of overhead cost that would be assigned to each model using the activity-based costing system. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Model N 800 XL Model N 500 Overhead cost per unit $ $ b. Compute the unit product cost of each model. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Model N 800 XL Model N 500 Unit product cost $ $

Explanation / Answer

Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Direct Labor-Hours Per Unit Annual Production Total Direct Labor-Hours Model N 800 XL 3.0 5,000 units 15,000 Model N 500 1.0 20,000 units 20,000 35,000 Additional information about the company follows: a. Model N 800 XL requires $60 in direct materials per unit, and Model N 500 requires $20. b. The direct labor wage rate is $15 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Activity Cost Pool Activity Measure Estimated Overhead Cost Machine setups Number of setups $ 455,000 Special processing Machine-hours 350,000 General factory Direct labor-hours 770,000 $1,575,000 Expected Activity Activity Measure Model N 800 XL Model N 500 Total Number of setups 250 250 500 Machine-hours 20,000 0 20,000 Direct labor-hours 15,000 20,000 35,000 Required 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. b. Compute the unit product cost of each model. 2. Assume that the company decides to use activity-based costing to apply manufacturing overhead cost to products. a. Compute the predetermined overhead rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based costing system. b. Compute the unit product cost of each model. 3. Explain why manufacturing overhead cost shifts from Model N 500 to Model N 800 XL under activity-based costing.

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