Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model

Question

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:

The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. Manufacturing overhead totals $1,621,800 per year.

Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling machine.

Because of the special work required in (d) above, the company is considering the use of activity-based costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Estimated Total Activity

Compute the predetermined overhead rate. (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Determine the unit product cost of each product. (Round pre-determined overhead rate to nearest dollar amount. Round other intermediate answers and the final answer to two decimal places. Omit the "$" sign in your response.)

Compute the activity rate for each activity cost pool. Also, compute the amount of overhead cost that would be applied to each product. (Round your overhead cost per unit to 2 decimal places. Omit the "$" sign in your response.)

Determine the unit product cost of each product. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:

Explanation / Answer

Answer 1. a. Predetermined Overhead Rate = $1621800 (Total Overhead) / 39300 (Total Direct Labour hrs) Predetermined Overhead Rate = $41.27 per labor hr. or $41 per labor hr. Answer b. Calculation of Total Cost Under Traditional Costing Model XR7 ZD5 Direct Material $39 $21 Direct labor                         25                           35 Overhead XR7- $41 X 0.5 Hrs                         21 ZD5 - $41 X 0.7 Hrs                           29 Total Unit Cost                         85                           85 Answer 2. a. Activity Cost Pool Estimated Overhead Expected use of Cost Drivers Activity-Based Overhead rate Machine Setups              167,200 220             760.00 Per setup Special miling              275,600 1060             260.00 per machine hour General factory           1,179,000 39300                30.00 per direct labor hr Total Overhead           1,621,800 Alocation of Overhead Cost Under ABC Particulars Model Total XR7 ZD5 Machine Setups                 66,880                100,320           167,200 Special miling              275,600                            -             275,600 General factory              360,000                819,000       1,179,000 Total              702,480                919,320       1,621,800 No. of Units 24000 39000 Overhead Cost per Unit                         29                           24 Calculation of Total Cost Under ABC Model XR7 ZD5 Direct Material $39 $21 Direct labor                         25                           35 Overhead                         29                           24 Total Unit Cost                         93                           80

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