Problem 3A-5 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing [LO3-8]

Siegel 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 $5,791,675 in manufacturing overhead cost and produce 21,000 units of the deluxe model and 113,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hours. Material and labor costs per unit are as follows:

	Model
	Deluxe		Regular
Direct materials	$	153	$	114
Direct labor	$	13	$	9

Required:

1-a.	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.)

1-b.	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.)

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

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase orders issued	$	301,350
Processing	Machine-hours		3,640,000
Scrap/rework	Scrap/rework orders issued		719,325
Shipping	Number of shipments		1,131,000
		$	5,791,675

	Expected Activity
Activity Measure	Deluxe	Regular	Total
Purchase orders issued	410	820	1,230
Machine-hours	18,200	27,300	45,500
Scrap/rework orders issued	575	460	1,035
Number of shipments	6,960	10,440	17,400

Determine the predetermined overhead rate for each of the four activity cost pools.

3.	Using the predetermined overhead rates computed in part (2), do the following:

a.	Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model. (Round "Overhead cost per unit" answers to 2 decimal places.)

b.

Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead). (Round your answers to 2 decimal places.)

Problem 3A-5 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing [LO3-8]

Siegel 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 $5,791,675 in manufacturing overhead cost and produce 21,000 units of the deluxe model and 113,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hours. Material and labor costs per unit are as follows:

	Model
	Deluxe		Regular
Direct materials	$	153	$	114
Direct labor	$	13	$	9

Required:

1-a.	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.)

1-b.	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.)

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

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase orders issued	$	301,350
Processing	Machine-hours		3,640,000
Scrap/rework	Scrap/rework orders issued		719,325
Shipping	Number of shipments		1,131,000
		$	5,791,675

	Expected Activity
Activity Measure	Deluxe	Regular	Total
Purchase orders issued	410	820	1,230
Machine-hours	18,200	27,300	45,500
Scrap/rework orders issued	575	460	1,035
Number of shipments	6,960	10,440	17,400

Determine the predetermined overhead rate for each of the four activity cost pools.

3.	Using the predetermined overhead rates computed in part (2), do the following:

a.	Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model. (Round "Overhead cost per unit" answers to 2 decimal places.)

b.	Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead). (Round your answers to 2 decimal places.)