P7B-3 - Please explain how you arrived at your answers. Thank you! Problem 7B-3

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P7B-3 - Please explain how you arrived at your answers. Thank you!

Problem 7B-3 Activity-Based Costing as an Alternative to Traditional Product Costing [LO7]

Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

      Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $5,858,600 in manufacturing overhead cost and produce 12,000 units of the deluxe model and 130,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires .5 hours. Material and labor costs per unit are as follows:

Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools:

Expected Activity

Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools.(Omit the "$" sign in your response.)

Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. (Round your overhead per unit to 2 decimal places. Omit the "$" sign in your response.)

Compute the unit product cost of each model (materials, labor, and manufacturing overhead). (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

  

Problem 7B-3 Activity-Based Costing as an Alternative to Traditional Product Costing [LO7]

Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

      Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $5,858,600 in manufacturing overhead cost and produce 12,000 units of the deluxe model and 130,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires .5 hours. Material and labor costs per unit are as follows:

Model Deluxe Regular   Direct materials $ 150     $ 114        Direct labor $ 19     $ 10      1a.

Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Predetermined overhead rate $  per DLH 1b.

Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

        Deluxe         Regular   Unit product cost $       $       2.

Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools:

  Activity Cost Pool Activity Measure Estimated
Overhead Cost   Purchase orders   Number of purchase orders $ 233,700        Scrap/rework orders   Number of scrap/rework orders 500,400        Product testing   Number of tests 1,624,500        Machine related   Machine-hours 3,500,000        Total overhead cost $ 5,858,600     

Expected Activity

  Activity Measure Deluxe Regular Total   Number of purchase orders 410     820     1,230   Number of scrap/rework orders 400     320     720   Number of tests 6,840     10,260     17,100   Machine-hours 20,000     30,000     50,000

Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools.(Omit the "$" sign in your response.)

  Activity Cost Pool Predetermined Overhead Rate           Purchase orders $ per purchase order   Scrap/rework orders $ per scrap/rework orders   Product testing $ per test   Machine related $ per MH 3. Using the predetermined overhead rates computed in part (2) above, do the following: a.

Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. (Round your overhead per unit to 2 decimal places. Omit the "$" sign in your response.)

  Activity Cost Pool     Deluxe     Regular   Total overhead cost $    $      Overhead cost per unit $    $    b.

Compute the unit product cost of each model (materials, labor, and manufacturing overhead). (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

  

       Deluxe        Regular   Direct materials $    $      Direct labor         Manufacturing overhead (above)         Total unit product cost $    $   

Explanation / Answer

1(a)

The predetermined overhead rate is $76.09 per direct labor hour.

1(b)

The product cost per unit of Delux Model is $245.09 and of Regular Model is $162.05.

2.

3(a)

The manufacturing overhead cost per unit is calculated as under:

3(b)

the total unit product cost using the manufactuirng overhead cost per unit on the basis of activity based costing is as under:

The unit product cost for Delux and Regular model is $369.48 and $150.56.

Delux Model Regular Model Total Production units                                12,000                          130,000 Direct labor time (in Hrs)                                    1.00                                 0.50 Total labor hours                                12,000                             65,000      77,000 Predetermined overhead rate on the basis of direct labor hours is computed as under: Predetermined overhead rate   = Manf.OH/Total direct         labor hours =$5,858,600/77,000 =$ 76.09

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