Problem 15-47 Product Cost Distortion and Product Pricing; Departmental Overhead Rates (LO 15-3, 15-7) Sounds Fine, Inc., manufactures two models of stereo speakers. Cost estimates
Problem 15-47 Product Cost Distortion and Product Pricing; Departmental Overhead Rates (LO 15-3, 15-7)
Sounds Fine, Inc., manufactures two models of stereo speakers. Cost estimates for the two models for the coming year are as follows:
| | Basic Model | | Advanced Model |
| Direct material | | $ | 340 | | | | $ | 490 | |
| Direct labor (10 hours at $21 per hour) | | | 210 | | | | | 210 | |
| Manufacturing overhead* | | | 220 | | | | | 220 | |
| Total cost | | $ | 770 | | | | $ | 920 | |
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*The predetermined overhead rate is $22 per direct-labor hour. Each stereo speaker requires 10 hours of direct labor. Each Basic Model unit requires three hours in Department I and seven hours in Department II. Each unit of the Advanced Model requires seven hours in Department I and three hours in Department II. The manufacturing overhead costs expected during the coming year in Departments I and II are as follows:
| | Department I | Department II |
| Variable overhead | $ | 17 per direct-labor hour | $ | 11 per direct-labor hour |
| Fixed overhead | $ | 252,000 | $ | 252,000 |
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The expected operating activity for the coming year is 31,500 direct-labor hours in each department. Required: 1. Calculate the total budgeted overhead cost and total expected direct-labor hours for both departments together. Compute the predetermined overhead rate per direct-labor hour.
| Budgeted overhead cost | | | Expected direct-labor hours | | |
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| | | Predetermined overhead rate | | per direct-labor hour | |
2. What will be the price of each model stereo speaker if the company prices its products at absorption manufacturing cost plus 20 percent?
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| | | | Price | | Basic model | | | Advanced model | | |
3. Suppose Sounds Fine, Inc., were to use departmental overhead rates. Compute these rates for Departments I and II for the coming year.
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| | | | Overhead rates | | Department I | | per direct-labor hour | | Department II | | per direct-labor hour | |
4. Compute the absorption cost of each model stereo speaker using the departmental overhead rates computed in requirement (3).
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| | | | Absorption cost | | Basic model | | | Advanced model | | |
5. Suppose management sticks with its policy of setting prices equal to absorption cost plus 20 percent. Compute the new price for each speaker model using the product costs developed in requirement (4).
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| | | | New price | | Basic model | | | Advanced model | | |
6. Should Sounds Fine, Inc., use plantwide or departmental overhead rates?
