Jordan Sound, Inc., makes two products, a radio/CD player combination called the Basic unit and a combination entertainment/communications unit called the Deluxe unit. These are both sold to auto manufacturers for installation in new vehicles. Recently the company has been losing bids on its high volume, bread-and-butter Basic units and winning bids on its low-volume specialty Deluxe units.

The accountant thinks that the problem may lie in the cost data used to price the bids and begins gathering basic information on the two products.

Budget for the current year:

Each product requires 2 direct labor hours to complete.

Estimated production Direct Labor Hours

Deluxe units 50,000 units 100,000

Basic units 200,000 units 400,000

Total DLH 500,000

Costs for material and labor for one unit of each product:

Deluxe Basic

Direct Materials $90 $50

Direct Labor ($10 per hour) 20 20

Estimated manufacturing overhead costs total $10,000,000.

The company has always used direct labor hours to assign overhead to products. Although the same amount of direct labor is required for each product, the more complex Deluxe units require more machine time, more machine setups, and more testing than the Basic units.

Also, the Deluxe units must be manufactured in smaller lots, so they require a relatively large number of production orders compared to the Basic units.

To compare the two approaches to overhead costing, we will first use the traditional method which uses a single POR based on direct labor hours to assign overhead and then well use activity based costing which uses various activities and rates to assign overhead.

Using Direct Labor Hours to assign overhead - The Traditional Volume-based Method

POR =

Product costs: Deluxe Basic

Direct materials $ 90 $ 50

Direct labor . 20 20

Manufacturing overhead _____ _____

Total unit product cost $ $