Question
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
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 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 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 40LEC 90Direct materials$20.00$46.00Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour)$3.00$9.00
Management estimates that the company will incur $920,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.
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:
Activity Cost PoolActivity MeasureEstimated Overhead CostMaintaining parts inventoryNumber of part types$258,000Processing purchase ordersNumber of purchase orders80,000Quality controlNumber of tests run32,000Machine-relatedMachine-hours550,000$920,000
Expected ActivityActivity MeasureLEC 40LEC 90TotalNumber of part types7501,4002,150Number of purchase orders1,6004002,000Number of tests run1,4001,8003,200Machine-hours4,0006,00010,000
Determine the activity rate for each of the four activity cost pools.(Round your answers to 2 decimal places.)
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