PROBLEM 4-15 Contrasting ABC and Conventional Product Costs L04-2.L04-3, L04-4 Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years, the flexible model was introduced several years ago to tap a new see ment of the market. Since introduction of the flexible model, the company's profits have steadily declined, Activity-Based Costing and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit.. Direct labor cost per unit..... Flexible $110.00 $30.00 Rigid $80.00 $15.00 Required: 1. Compute the predetermined overhead rate using direct labor-hows as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of tach model. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows: Activity-Based Costing and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1.000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below: Direct materials cost per unit.. Direct labor cost per unit.... Flexible $110.00 $30.00 Rigid $80.00 $15.00 Required: 1. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. 2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows: Activity Cost Pool and Activity Measure Purchase orders (number of orders). Rework requests (number of requests)... Product testing (number of tests)....... Machine-related (machine-hours)...... Estimated Overhead Cost $ 20,000 10,000 210,000 360,000 $600,000 Expected Activity Flexible Rigid Total 100 300 400 60 140 200 900 1,200 2,100 1,500 2,500 4,000 Compute the activity rate for each of the activity cost pools. 3. Using activity-based costing, do the following: a. Determine the total amount of overhead that would be assigned to each model for the year. b. Compute the unit product cost for one unit of each model. 4. Can you identify a possible explanation for the company's declining profits? If so, what is it
