Wolverines Company manufacturers a product available in a regular and deluxe mod

Question

Wolverines Company manufacturers a product available in a regular and deluxe model. In recent years, the volume of the deluxe model has increased relative to the regular model while company profits have decreased.  Management is concerned about the accuracy of the costing system.

                                                    

                                                       

    Regular                     Deluxe

Direct Materials                              $120                       $150

Direct labor                                          6                           12

a. Using direct-labor hours as the allocation base for assigning overhead, compute the predetermined overhead rate and the cost per unit for each product.

Assume overhead costs can be traced to two activity centers.  These activity centers, their cost drivers, and estimated cost and cost driver activity levels are shown below:

                                                                                    Estimated cost driver level

Activity Center (and cost driver)  Estimated            Total              Regular            Deluxe

                                                      Overhead costs

Purchased orders (# of orders)       $1,000,000         1,000                 300                  700

Machine related (machine hours)   $4,000,000        40,000               10,000           30,000

          Total overhead cost               $5,000,000

b. Using activity-based costing, compute the overhead costs assignable to each product and the overhead cost per unit for each product

c. Using activity-based costing, compute the cost per unit for the two products.

Wolverines Company manufacturers a product available in a regular and deluxe model. In recent years, the volume of the deluxe model has increased relative to the regular model while company profits have decreased. Management is concerned about the accuracy of the costing system. Overhead is assigned on direct labor hours. For the current year, expected overhead cost is $5,000,000. Wolverines expects 100,000 regular units to be produced, each unit taking 0.8 of an hour, so the total time is expected to be 80,000 hours. Wolverines also expects 40,000 deluxe units to be produced, each unit taking 0.5 hours, so the total time expected is 20,000 hours. Direct materials and direct labor costs per unit are as follows: Using direct-labor hours as the allocation base for assigning overhead, compute the predetermined overhead rate and the cost per unit for each product. Assume overhead costs can be traced to two activity centers. These activity centers, their cost drivers, and estimated cost and cost driver activity levels are shown below: Using activity-based costing, compute the overhead costs assignable to each product and the overhead cost per unit for each product Using activity-based costing, compute the cost per unit for the two products.

Explanation / Answer

a.) Expected overhead cost = $5,000,000

Estimated direct labor hours = DL hrs for regular + Dl hrs for deluxe

= 80,000 + 20,000 hrs = 100,000 hrs

  

Predetermined OH rate = (Estimated manufacturing OH)/(Estimated direct labor hours)

= $5,000,000 / 100,000 hrs = 50 $/hr

Cost Per unit:

Regular = DM cost + DL cost = $120 + Predetermined OH rate*DL hrs used

= 120 + (50 $/hr x 6) = $420

Deluxe = DM cost + DL cost = $150 + Predetermined OH rate*DL hrs used

= 150 + (50 $/hr x 12) = $750

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