For many years, Zapro Company manufactured a single product called a mono-relay.
ID: 2435070 • Letter: F
Question
For many years, Zapro Company manufactured a single product called a mono-relay. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called a bi-relay that has become increasingly popular. The bi-relay is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The mono-relay requires only 0.75 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.Despite the growing popularity of the company's new bi-relay, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company's costing system. Material and labor costs per unit are as follows:
Mono-Relay Bi-Relay
Direct materials $ 32 $ 56
Direct labor (0.75 hours @ $12 per hour and
1.0 hours @ $12 per hour)
$ 9 $ 12
Management estimates that the company will incur $908,000 in manufacturing overhead costs during the current year and 40,000 units of the mono-relay and 10,000 units of the bi-relay will be produced and sold.
Requirement 1:
Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Predetermined manufacturing overhead rate $ per DLH
Unit product cost of Mono-Relay $
Unit product cost of Bi-Relay $
Requirement 2:
Management is considering using activity-based costing to apply manufacturing overhead cost 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
Maintaining parts inventory Number of part types $ 228,000
Processing purchase orders Number of purchase orders 180,000
Quality control Number of tests run 40,000
Machine related Machine-hours 460,000
908,000
Expected Activity
Activity Measure Mono-Relay Bi-Relay Total
Number of part types 75 150 225
Number of purchase orders 800 200 1,000
Number of tests run 2,500 3,250 5,750
Machine-hours 4,000 6,000 10,000
Determine the activity rate (i.e., predetermined overhead rate) for each of the four activity cost pools. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Activity Cost Pool Activity Rate
Maintaining inventory $ per part type
Processing purchase orders $ per order
Quality control $ per test
Machine-related $ per MH
Requirement 3:
Using the activity rates you computed in Requirement 2 above, do the following
(a) Determine the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Overhead per unit of Mono-Relay $
Overhead per unit of Bi-Relay $
(b) Compute the unit product cost of each product. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Unit product cost for Mono-Relay $
Unit product cost for Bi-Relay $
Explanation / Answer
Requirement 1:
Predetermined manufacturing overhead rate $25.00 per DLH
40,000 units of Mono-relay @0.75 hours PU 30,000 hours
10,000 units of Bi-relay @1.00 hour PU 10,000 hours
Total Direct labor hours required 40,000 hours
Predetermined OH Rate = Total Manufacturing Overhead
Total Direct labor hour
= $1,000,000 / 40,000 = $25.00 per DLH
Unit product cost of Mono-Relay $62.75
Unit product cost of Bi-Relay $85.00
Mono-Relay Bi-Relay
Direct Materials $35.00 $48.00
Direct Labor $9.00 $12.00
Manufacturing OH
$25.00 x 0.75 $18.75
$25.00 x 1.00 $25.00
Unit Product Cost $62.75 $85.00
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Requirement 2:
Determine the activity rate (i.e., predetermined overhead rate) for each of the four activity cost pools. (Omit the "$" sign in your response.)
Activity Estimated Expected Activity
Cost Pool Cost Activity Rate
Maintaining $180,000 225 part types $800 per
inventory $180,000 / 225 part type
Processing $90,000 1,000 orders $90 per
purchase order $90,000 / 1,000 order
Quality $230,000 5,750 tests $40 per
control $230,000 / 5,750 test
Machine $500,0000 10,000 MHs. $50 per
related $500,0000 / 10,000 MHs. MH
Requirement 3:
(a) Determine the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Mono-Relay Bi-Relay
Exp. Activity Amount Exp. Act. Amount
Maintaining
Parts Inv. @$800 75 $60,000 150 $120,000
Processing
PO @$90 800 $72,000 200 $18,000
QC @$40 2,500 $100,000 3,250 $130,000
Machine related
@$50 4,000 $200,000 6,000 $300,000
Total Manufacturing
Overhead Cost $432,000 $568,000
Units produced 40,000 10,000
Manufacturing OH
Per unit $10.80 $56.80
(b) Compute the unit product cost of each product. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Mono-Relay Bi-Relay
Direct Materials $35.00 $48.00
Direct Labor $9.00 $12.00
Manufacturing OH $10.80 $56.80
Unit Product Cost $54.80 $116.80
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