For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.80 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant.

The LEC 40 requires only 0.40 hours 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 LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company's costing system.

Direct material and direct labor costs per unit are as follows:

LEC 40 ...............LEC 90

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.00 . . . . . . . . . . . $50.00

Direct labor (0.40 hours and 0.80 hours @ $15.00 per hour). . . . . . . $6.00 . . . . . . . . . . . $12.00

Management estimates that the company will incur $912,000 in manufacturing overhead costs during the current year and 60,000 units of the LEC 40 and 20,000 units of the LEC 90 will be produced and sold.

Required:

1. Compute the predetermined 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.

2. Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:

Determine the activity rate for each of the four activity cost pools.
3. Using the activity rates you computed in part (2) above, do the following:
a. Determine the total amount of manufacturing overhead cost that would be assigned 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.
b. Compute the unit product cost of each product.
4. From the data you have developed in parts (1) through (3) above, identify factors that may account for the company's declining profits.

Transcribed Image Text:

Estimated Activity Measure Activity Cost Pool Overhead Cost $225,000 Maintaining parts inventory.. . . . . . . .Number of part types Processing purchase orders. . . . . . . . . . Number of purchase orders Quality control . .. . . . . . . . .. . . . Number of tests run 182,000 460,000 $912,000 45,000 Expected Activity Activity Measure LEC 40 LEC 90 Total Number of part types 600 900 1,500 2,000 800 2800 500 1,750 2,250 Machine-hours...