| Problem 7B-3 Activity-Based Costing as an Alternative to Traditional Product Costing [LO7] | Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured 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 companys profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. | | Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $5,858,600 in manufacturing overhead cost and produce 12,000 units of the deluxe model and 130,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires .5 hours. Material and labor costs per unit are as follows: | | | Model | | | Deluxe | Regular | | Direct materials | $ | 150 | $ | 114 | | Direct labor | $ | 19 | $ | 10 | | | | 1a. | Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. (Round your answer to 2 decimal places. Omit the "$" sign in your response.) | | Predetermined overhead rate | $ per DLH | | 1b. | Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.) | | | Deluxe | Regular | | Unit product cost | $ | $ | | | | 2. | Management is considering using activity-based costing to apply manufacturing overhead costs 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 | | Purchase orders | Number of purchase orders | $ | 233,700 | | Scrap/rework orders | Number of scrap/rework orders | | 500,400 | | Product testing | Number of tests | | 1,624,500 | | Machine related | Machine-hours | | 3,500,000 | | | | | | | Total overhead cost | | $ | 5,858,600 | | | | | | | | | | Expected Activity | | Activity Measure | Deluxe | Regular | Total | | Number of purchase orders | 410 | 820 | 1,230 | | Number of scrap/rework orders | 400 | 320 | 720 | | Number of tests | 6,840 | 10,260 | 17,100 | | Machine-hours | 20,000 | 30,000 | 50,000 | | | | Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools.(Omit the "$" sign in your response.) | | Activity Cost Pool | Predetermined Overhead Rate | | Purchase orders | $ | per purchase order | | Scrap/rework orders | $ | per scrap/rework orders | | Product testing | $ | per test | | Machine related | $ | per MH | | | | 3. | Using the predetermined overhead rates computed in part (2) above, do the following: | | a. | Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. (Round your overhead per unit to 2 decimal places. Omit the "$" sign in your response.) | | Activity Cost Pool | Deluxe | Regular | | Total overhead cost | $ | $ | | Overhead cost per unit | $ | $ | | | | b. | Compute the unit product cost of each model (materials, labor, and manufacturing overhead). (Round your answers to 2 decimal places. Omit the "$" sign in your response.) | | | Deluxe | Regular | | Direct materials | $ | $ | | Direct labor | | | | Manufacturing overhead (above) | | | | | | | | Total unit product cost | $ | $ | | | | | | | |
