Seacord Company manufactures a product that comes in both a deluxe model and a r
ID: 2427944 • Letter: S
Question
Seacord Company manufactures a product that comes 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.
Overhead is assigned to the products on a traditional basis of direct labor-hours. For 2013 the company estimated that it would incur $900,000 in overhead costs and produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires two hours of direct labor time, and the regular model requires one hour. Material and labor costs per unit are as follows:
Deluxe
Regular
Direct materials
$50
$35
Direct labor (at $8 per hour)
16
8
Required
1. Compute the traditional predetermined overhead rate for 2013, and determine the cost to manufacture one unit of each model.
2. Assume that the company's overhead costs can be traced to four major activities. These activities, and the amount of overhead cost traceable to each for 2013 are given below:
Number
of Events
Activity
Traceable Costs
Total
Deluxe
Regular
Purchase orders issued
$204,000
600
200
400
Machine-hours required
182,000
35,000
20,000
15,000
Scrap/rework orders issued
379,000
2,000
1,000
1,000
Shipments made
135,000
900
250
650
$900,000
Determine the amount of overhead cost per event for each of the four activities above.
3. Using the data presented or computed in (2) above and an activity costing approach, do the following.
a. Determine the total amount of overhead cost assignable to each model for 2013. After these totals have been computed, determine the amount of overhead cost per unit of each model.
b. Compute the total cost to manufacture one unit of each model (materials, labor, and overhead).
4. From the data you have developed in (1) through (3) above, identify factors that may account for the company's declining profits.
Deluxe
Regular
Direct materials
$50
$35
Direct labor (at $8 per hour)
16
8
Explanation / Answer
1)
Traditional predetermined overhead rate for 2013= $900000/45000 units = $20
Cost to manufacture Deluxe model = $20 * 5000 units = $100000
Cost to manufacture regular model = $20* 40000 units = $800000
2)
Number
of Events
Cost per activity
Activity
Traceable Costs
Total
Deluxe
Regular
Purchase orders issued
$204,000
600
200
400
340
Machine-hours required
182,000
35,000
20,000
15,000
5.2
Scrap/rework orders issued
379,000
2,000
1,000
1,000
189.5
Shipments made
135,000
900
250
650
150
$900,000
3) a
Cost assign to
Activity
Deluxe cost
Regular cost
Purchase orders issued
68000
136000
Machine-hours required
104000
78000
Scrap/rework orders issued
189500
189500
Shipments made
37500
97500
399000
501000
b) Total cost to manufacture one unit of each model =
Manufacturing cost
Deluxe
Regular
Direct materials
250000
1400000
Direct labour
80000
320000
Manufacturing overhead
399000
501000
Total manufacturing cost
729000
2221000
Number
of Events
Cost per activity
Activity
Traceable Costs
Total
Deluxe
Regular
Purchase orders issued
$204,000
600
200
400
340
Machine-hours required
182,000
35,000
20,000
15,000
5.2
Scrap/rework orders issued
379,000
2,000
1,000
1,000
189.5
Shipments made
135,000
900
250
650
150
$900,000
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