Weston Corporation manufactures a product that is available in both a deluxe and
ID: 2552721 • Letter: W
Question
Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made 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 concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year management estimated that $3,400,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires 2.5 hours of direct labor time per unit, and the regular model requires 1.5 hour. Materials and labor costs per unit are given below: Direct materials cost per unit Direct labor cost per unit Deluxe Regular $45.00 $25.00 S25.00 $13.00 Required: 1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products per DLH 1-b. Compute the unit product cost for one unit of each model Unit product cost Deluxe Regular 2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows Expected Activity Estimated Overhead Activity Cost Pool and Activity Measure Purchase orders (number of orders) Rework requests (number of requests) Product testing (number of tests) Machine related (machine-hours) Cost Deluxe Regular Total 700 ,200 315,000 1,000 1,625 2,625 275,000 7,700 4,800 12,500 2,715,000 5,500 8,075 13,575 95,000 1,900 $3,400,000 Compute the activity rate for each of the activity cost pools. Activity Cost Pool Purchase orders Rework requests Product testing Machine-related Activity Rate per order per request per test per MHExplanation / Answer
1.
The predetermined overhead rate is computed on direct labor hours. The total direct labor hours are computed below:
Deluxe:
Number of units * direct labor hours per unit
= 10000 * 2.5
= 25000 hours
Regular:
Number of units * direct labor hours per unit
= 40000 * 1.5
=60000 hours
Total direct labor hours:
= 25000+ 60000
= 85000
Predetermined overhead rate:
Estimated total manufactured overhead cost/ Estimated direct labor hours
= 340000 /85000
= $4
Predetermined overhead rate = $ 4 per direct labor hours.
The predetermined overhead to
Delulxe = Direct labor hours * predetermined overhead rate
= 2.5 * $4
= $10
Regular = Direct labor hours * predetermined overhead rate
= 1.5 * $4
= $6
2.
3.
Activity cost pool Activity rate Purchase orders 95000/1900 50 Per order Rework requests 315000/2625 120 Per request product testing 275000/12500 22 Per test Machine-related 2715000/13575 200 Per MHRelated Questions
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